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    Delivering digital infrastructure in the AI age

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    With the advent of generative artificial intelligence (gen AI) and the metaverse, the demand for digital infrastructure is exploding.

    Over the past decade, investment in digital infrastructure has reached unprecedented levels due to the increasing penetration of smartphones, the digitalization of industries, and the rise of cloud computing, while the rapid evolution of AI technologies, machine learning, and the metaverse The demand for data and computing is increasing. The power to reach even higher heights.

    Powering these innovative technologies will require significant investments in data centers and networks that provide the data and connectivity needed for AI and the Metaverse to function.

    hyperscaler

    The main users and the main drivers of demand for data center capacity are the hyper It's a scaler. Software architecture allows capacity to be scaled up across multiple servers and networks to meet the demands placed on software and technology systems at a given point in time.

    Jones Lang LaSalle says there will be more than 1,000 hyperscalar data center sites in operation by the end of 2024, up from just 500 sites five years ago. Due to this, the hyperscale data market is expected to grow at a CAGR of 20% from 2021 to 2026.

    These hyperscalers are increasingly attracting industry attention, with developers, operators, and investors building increasingly large data center campuses. This increases the demand for connectivity via fiber and towers.

    Continued investment in new data center capacity and related digital infrastructure by both hyperscalers and colocation developers is essential to meet the excess demand arising from AI and the metaverse.

    Market Drivers: Defining the Metaverse and AI

    And while the generative AI boom has made AI more accessible and mainstream, companies still don't fully understand what these technologies mean for doing business. Yet, its growth and disruptive impact have made investments in AI and the Metaverse both commercial and strategic. A must-have for your organization.

    The next evolution of the Metaverse and the Internet

    For example, the metaverse remains a broadly defined concept that means different things to different people. But even though the metaverse is still not precisely defined, it is influencing consumer behavior and corporate strategy.

    Essentially, the next evolution of the Metaverse and the Internet, and the technologies that can be used to leverage virtual and augmented reality to build virtual worlds and facilitate frictionless interactions between digital and physical spaces. is.

    A KPMG survey of technology executives found that 60% of respondents believe the metaverse will increase profits and reduce operating costs as transactions move from physical to virtual. thinking about. Meanwhile, McKinsey estimates that the Metaverse could generate up to US$5 trillion in value by his 2030.

    Enterprise adoption of AI, the ability for computers to perform tasks that typically require human intelligence and judgment, is also on the rise and has rapidly gained momentum in the operations of all industries in recent years.

    The rapid growth and adoption of AI technology in recent years is just the beginning

    For example, according to research from DemandSage, there are more than 4.2 billion digital assistants such as Siri, Alexa, and Google in use today, and more than 50% of consumers use these tools to find local businesses. We plan to realize a value of USD 40 billion. In the pharmaceutical sector, Wellcome Trust research shows that AI has the potential to have a transformative impact on drug discovery pipelines, reducing time and costs by 25% to 50%. Additionally, in the wealth management industry, asset managers are building proprietary AI-powered tools that fund managers use to benchmark the performance of portfolio companies and source potential trading targets. Masu.

    The rapid growth and adoption of AI technology in recent years is just the beginning. According to the International Data Corporation (IDC), annual global spending on AI software, hardware, and services is expected to grow at a compound annual growth rate (CAGR) of 27% over the five years to 2026. It will now exceed the United States. 300 billion dollars.

    Challenges to overcome

    The need for digital infrastructure ensures an influx of capital into the sector, protecting developers and investors from macroeconomic disruptions.

    However, there are also issues that need to be resolved.

    • High-margin development of business-critical infrastructure exposes operators and developers to potentially significant debt. Legal obligations, particularly in the development and servicing context, need to be understood and reconciled to ensure that projects are manageable from a corporate governance perspective and acceptable to the financing and investment community.
    • Developers' contractual obligations are under pressure. Inflationary pressures and supply chain disruptions are impacting new data center construction and delaying project commissioning. According to the latest data center cost index, infrastructure consultancy Turner & Townsend says 95% of its data center stakeholders are experiencing delays due to material shortages, with wait times for some equipment extending over 12 weeks. I discovered that it goes beyond that. Delays have pushed projects over budget, adding to cost pressures from rising commodity and labor prices. If legal documents are not carefully negotiated, these can lead to increased developer defaults.
    • The pressures of environmental regulation and climate change cannot be ignored. According to McKinsey, data centers are extremely power hungry, with some hyperscaler sites using the equivalent of 80,000 homes. McKinsey's analysis also shows that the average power density of data centers has more than doubled over the past five to six years due to new computer chips and more powerful computers. Government policies to reduce carbon emissions to net zero have led regulators to pay close attention to data center energy usage. For example, due to updates to the EU's Energy Efficiency Directive, data centers over 500 kW will be required to report their energy usage and emissions from May 2024. Andrew Jay, head of EMEA data center solutions at CBRE, agrees that this means that “new and existing investors continue to focus on the ESG credentials of these facilities, and that the energy consumed in data centers This scrutiny will become increasingly important as it becomes more important relative to its use.'' Legal documentation in this area will continue to move in the direction of transparency regarding consumption and efficiency to keep pace with this challenge. It is necessary to proceed to
    • Antitrust and competition. The sector has also received attention from competition and antitrust authorities, with the UK's Competition and Markets Authority (CMA) assessing the risks of competition in the UK data center ecosystem due to large players holding a dominant market share. An investigation has begun. One of the few hyperscalar players. Regulators are concerned that a lack of competition in the market could make it harder and more expensive for customers to switch providers. M&A activity is slowing in 2023, and these regulatory pressures are likely to become more pronounced as deal volumes begin to increase, as most expect.
    • Financing structure. The growing influence of hyperscalers is also reshaping how data centers and digital infrastructure are financed. For example, private investment has become an important source of funding for data center development, and McKinsey estimates that the share of private equity in total data center transactions will increase from 42% from 2015 to 2018 to more than 90% by 2022. Pointed out. That is changing, however, as hyperscalers become more influential and use their position as anchor customers to negotiate more favorable contract and lease terms, squeezing the profits of colocation data center operators in the process. It's coming. This has curbed private capital flows and made investors wary of expensive data center assets in a volatile trading market hampered by rising interest rates. With bond markets also tightening overall as a result of rising interest rates, digital infrastructure operators and investors will need to explore new structures and options to fund the deployment of additional capacity in the short to medium term. There may be.

    Metaverse could create up to 4% trillion in value by 2030
    Source: McKinsey

    Digital infrastructure now offers investors exposure to assets with strong market positions and high levels of repeat returns.

    Digital Infrastructure: The Foundation of AI and the Metaverse

    More digital infrastructure is needed to support the anticipated growth of AI and the metaverse.

    Digital infrastructure includes all the underlying frameworks that enable digital tools to function, such as hardware, software, network connections, and data centers. It is the foundation of all the digital services, internet tools, connectivity, and cloud computing applications that have become essential to the modern economy.

    AI and metaverse applications require particularly large data resources and computing power to function, and as their adoption continues to accelerate, the strain on digital infrastructure capacity will continue to grow. According to Gartner research, generated AI accounted for less than 1% of the data generated in 2021, but is expected to swallow 10% of the capacity by the end of 2025 and continue to increase thereafter. It has been. Meanwhile, Intel estimates that to realize the Metaverse's full potential, it will need to increase its current computing power by a factor of 1,000.

    Andrew Jay defines the opportunity for the industry. “The AI ​​boom will drive a new wave of change and development in Europe’s data infrastructure. Much of the new capacity will be absorbed by hyperscale operators, but there is a huge opportunity for colocation vendors. “To develop new purpose-built facilities. The speed and scale of growth is leading to the entry of new capital partners who want to be at the forefront of this sector and capture an ever-expanding share in EMEA.” Masu.”

    Demand for data and computing power already exceeds supply, and emerging technologies are driving even more demand. Despite rising global interest rates, inflationary pressures and a weakening macroeconomic backdrop, long-term demand factors make digital infrastructure fast-growing and resilient for investors, developers, operators and financiers. It is positioned as an asset class.

    White & Case consists of White & Case LLP, a New York State registered limited liability partnership, White & Case LLP, a limited liability partnership organized under English law, and all other affiliated partnerships, companies and organizations. international legal services.

    This article is intended for general information purposes only. It is not, and does not purport to be, comprehensive in nature. Its content is general in nature and should not be considered legal advice.

    © 2024 White & Case LLP

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