Live from Morgan Stanley’s European Tech, Media and Telecom
Conference in Barcelona, our roundtable of analysts discusses
tech disruptions and datacenter growth, and how Europe factors
in.
Read more insights from Morgan Stanley.
----- Transcript -----
Paul Walsh: Welcome to Thoughts on the
Market. I'm Paul Walsh, Morgan Stanley's European Head of
Research Product.
Today we return to my conversation with Adam Wood. Head of
European Technology and Payments, Emmet Kelly, Head of European
Telco and Data Centers, and Lee Simpson, Head of European
Technology.
We were live on stage at Morgan Stanley's 25th TMT Europe
conference. We had so much to discuss around the themes of AI
enablers, semiconductors, and telcos. So, we are back with a
concluding episode on tech disruption and data center
investments.
It's Thursday the 13th of November at 8am in Barcelona.
After speaking with the panel about the U.S. being overweight AI
enablers, and the pockets of opportunity in Europe, I wanted to
ask them about AI disruption, which has been a key theme here in
Europe. I started by asking Adam how he was thinking about this
theme.
Adam Wood: It’s fascinating to see this
year how we've gone in most of those sectors to how positive can
GenAI be for these companies? How well are they going to monetize
the opportunities? How much are they going to take advantage
internally to take their own margins up? To flipping in the
second half of the year, mainly to, how disruptive are they going
to be? And how on earth are they going to fend off these
challenges?
Paul Walsh: And I think that speaks to the
extent to which, as a theme, this has really, you know, built
momentum.
Adam Wood: Absolutely. And I mean, look, I
think the first point, you know, that you made is absolutely
correct – that it's very difficult to disprove this. It's going
to take time for that to happen. It's impossible to do in the
short term. I think the other issue is that what we've seen is –
if we look at the revenues of some of the companies, you
know, and huge investments going in there.
And investors can clearly see the benefit of
GenAI. And so investors are right to ask the question,
well, where's the revenue for these businesses?
You know, where are we seeing it in info services or in IT
services, or in enterprise software. And the reality is today,
you know, we're not seeing it. And it's hard for analysts to
point to evidence that – well, no, here's the revenue base,
here's the benefit that's coming through. And so, investors
naturally flip to, well, if there's no benefit, then surely, we
should focus on the risk.
So, I think we totally understand, you know, why people are
focused on the negative side of things today. I think there are
differences between the sub-sectors. I mean, I think if we look,
you know, at IT services, first of all, from an investor point of
view, I think that's been pretty well placed in the losers’
buckets and people are most concerned about that
sub-sector…
Paul Walsh: Something you and the global
team have written a lot about.
Adam Wood: Yeah, we've written about, you
know, the risk of disruption in that space, the need for those
companies to invest, and then the challenges they face. But I
mean, if we just keep it very, very simplistic. If Gen AI is a
technology that, you know, displaces labor to any extent –
companies that have played labor arbitrage and provide labor for
the last 20 - 25 years, you know, they're going to have to make
changes to their business model.
So, I think that's understandable. And they're going to have to
demonstrate how they can change and invest and produce a business
model that addresses those concerns. I'd probably put info
services in the middle. But the challenge in that space is
you have real identifiable companies that have emerged, that have
a revenue base and that are challenging a subset of the products
of those businesses. So again, it's perfectly understandable that
investors would worry. In that context, it's not a
potential threat on the horizon. It's a real threat that exists
today against certainly their businesses.
I think software is probably the most interesting. I'd put it in
the kind of final bucket where I actually believe… Well, I think
first of all, we certainly wouldn't take the view that
there's no risk of disruption and things aren't going
to change. Clearly that is going to be the case.
I think what we'd want to do though is we'd want to continue to
use frameworks that we've used historically to think about how
software companies differentiate themselves, what the barriers to
entry are. We don't think we need to throw all of those things
away just because we have GenAI, this new set of capabilities.
And I think investors will come back most easily to that space.
Paul Walsh: Emett, you talked a little bit
there before about the fact that you haven't seen a huge amount
of progress or additional insight from the telco space around AI;
how AI is diffusing across the space. Do you get any discussions
around disruption as it relates to telco space?
Emmet Kelly: Very, very little. I think the
biggest threat that telcos do see is – it is from the
hyperscalers. So, if I look at and separate the B2C market out
from the B2B, the telcos are still extremely dominant in the B2C
space, clearly. But on the B2B space, the hyperscalers have come
in on the cloud side, and if you look at their market share,
they're very, very dominant in cloud – certainly from a wholesale
perspective.
So, if you look at the cloud market shares of the big three
hyperscalers in Europe, this number is courtesy of my colleague
George Webb. He said it's roughly 85 percent; that's how much
they have of the cloud space today. The telcos, what they're
doing is they're actually reselling the hyperscale service under
the telco brand name.
But we don't see much really in terms of the pure kind of AI
disruption, but there are concerns definitely within the telco
space that the hyperscalers might try and move from the B2B space
into the B2C space at some stage. And whether it's through
virtual networks, cloudified networks, to try and get into the
B2C space that way.
Paul Walsh: Understood. And Lee maybe less
about disruption, but certainly adoption, some insights from your
side around adoption across the tech hardware space?
Lee Simpson: Sure. I think, you know, it's
always seen that are enabling the AI move, but, but there is
adoption inside semis companies as well, and I think I'd point to
design flow. So, if you look at the design
guys, they're embracing the agentic system thing
really quickly and they're putting forward this capability of an
agent engineer, so like a digital engineer. And it – I guess
we've got to get this right. It is going to enable a faster time
to market for the design flow on a chip.
So, if you have that design flow time, that time to market. So,
you're creating double the value there for the client. Do you
share that 50-50 with them? So, the challenge is going to be
exactly as Adam was saying, how do you monetize this stuff? So,
this is kind of the struggle that we're seeing in adoption.
Paul Walsh: And Emmett, let's
move to you on data centers. I mean, there are just some
incredible numbers that we've seen emerging, as it relates to the
hyperscaler investment that we're seeing in building out the
infrastructure. I know data centers is something that you have
focused tremendously on in your research, bringing our global
perspectives together. Obviously, Europe sits within that. And
there is a market here in Europe that might be more challenged.
But I'm interested to understand how you're thinking about
framing the whole data center story? Implications for Europe. Do
European companies feed off some of that U.S. hyperscaler CapEx?
How should we be thinking about that through the European
lens?
Emmet Kelly: Yeah, absolutely. So, big
question, Paul. What…
Paul Walsh: We've got a few minutes!
Emmet Kelly: We've got a few minutes. What
I would say is there was a great paper that came out from Harvard
just two weeks ago, and they were looking at the scale of data
center investments in the United States. And clearly the U.S.
economy is ticking along very, very nicely at the moment. But
this Harvard paper concluded that if you take out data center
investments, U.S. economic growth today is actually zero.
Paul Walsh: Wow.
Emmet Kelly: That is how big the data
center investments are. And what we've said in our
research very clearly is if you want to build a megawatt of data
center capacity that's going to cost you roughly $35 million
today.
Let's put that number out there. 35 million. Roughly, I'd say 25…
Well, 20 to 25 million of that goes into the chips.
But what's really interesting is the other remaining $10 million
per megawatt, and I like to call that the picks and shovels of
data centers; and I'm very convinced there is no bubble in that
area whatsoever.
So, what's in that area? Firstly, the first building block of a
data center is finding a powered land bank. And this is a big
thing that private equity is doing at the moment. So, find some
real estate that's close to a mass population that's got a good
fiber connection. Probably needs a little bit of water, but most
importantly needs some power.
And the demand for that is still infinite at the moment. Then
beyond that, you've got the construction angle and there's a very
big shortage of labor today to build the shells of these data
centers. Then the third layer is the likes of capital
goods, and there are serious supply bottlenecks there
as well.
And I could go on and on, but roughly that first $10 million,
there's no bubble there. I'm very, very sure of that.
Paul Walsh: And we conducted some extensive
survey work recently as part of your analysis into the global
data center market. You've sort of touched on a few of the gating
factors that the industry has to contend with. That survey work
was done on the operators and the supply chain, as it relates to
data center build out.
What were the key conclusions from that?
Emmet Kelly: Well, the key conclusion was
there is a shortage of power for these data centers, and…
Paul Walsh: Which I think… Which is a sort
of known-known, to some extent.
Emmet Kelly: it is a known-known, but it's
not just about the availability of power, it's the availability
of green power. And it's also the price of power is a very
big factor as well because energy is roughly 40 to 45 percent of
the operating cost of running a data center. So, it's very, very
important. And of course, that's another area where Europe
doesn't screen very well.
I was looking at statistics just last week on the countries that
have got the highest power prices in the world. And
unsurprisingly, it came out as UK, Ireland, Germany, and that's
three of our big five data center markets. But when I looked at
our data center stats at the beginning of the year, to put a bit
of context into where we are…
Paul Walsh: In Europe…
Emmet Kelly: In Europe versus the rest. So,
at the end of [20]24, the U.S. data center market had 35
gigawatts of data center capacity. But that grew last year at a
clip of 30 percent. China had a data center bank of roughly 22
gigawatts, but that had grown at a rate of just 10 percent. And
that was because of the chip issue. And then Europe has capacity,
or had capacity at the end of last year, roughly 7 to 8
gigawatts, and that had grown at a rate of 10 percent.
Now, the reason for that is because the three big data center
markets in Europe are called FLAP-D. So, it's Frankfurt, London,
Amsterdam, Paris, and Dublin. We had to put an acronym on it. So,
Flap-D. Good news. I'm sitting with the tech guys. They've got
even more acronyms than I do, in their sector, so well done
them.
Lee Simpson: Nothing beats FLAP-D.
Paul Walsh: Yes.
Emmet Kelly: It’s quite an achievement. But
what is interesting is three of the big five markets in Europe
are constrained. So, Frankfurt, post the Ukraine conflict.
Ireland, because in Ireland, an incredible statistic is data
centers are using 25 percent of the Irish power grid. Compared to
a global average of 3 percent.
Now I'm from Dublin, and data centers are running into conflict
with industry, with housing estates. Data centers are using 45
percent of the Dublin grid, 45. So, there's a moratorium in
building data centers there. And then Amsterdam has the classic
semi moratorium space because it's a small country with a very
high population.
So, three of our five markets are constrained in Europe. What is
interesting is it started with the former Prime Minister Rishi
Sunak. The UK has made great strides at attracting data center
money and AI capital into the UK and the current Prime Minister
continues to do that. So, the UK has definitely gone; moved from
the middle lane into the fast lane. And then Macron in France. He
hosted an AI summit back in February and he attracted over a 100
billion euros of AI and data center commitments.
Paul Walsh: And I think if we added up, as
per the research that we published a few months ago, Europe's
announced over 350 billion euros, in proposed investments around
AI.
Emmet Kelly: Yeah, absolutely. It's a good
stat. Now where people can get a little bit cynical is they can
say a couple of things. Firstly, it's now over a year since the
Mario Draghi report came out. And what's changed since?
Absolutely nothing, unfortunately. And secondly, when I look at
powering AI, I like to compare Europe to what's happening in the
United States. I mean, the U.S. is giving access to nuclear power
to AI. It started with the three Mile Island…
Paul Walsh: Yeah. The nuclear renaissance
is…
Emmet Kelly: Nuclear Renaissance is
absolutely huge. Now, what's underappreciated is actually Europe
has got a massive nuclear power bank. It's right up there. But
unfortunately, we're decommissioning some of our nuclear power
around Europe, so we're going the wrong way from that
perspective. Whereas President Trump is opening up the nuclear
power to AI tech companies and data centers.
Then over in the States we also have gas and turbines. That's a
very, very big growth area and we're not quite on top of that
here in Europe. So, looking at this year, I have a feeling that
the Americans will probably increase their data center capacity
somewhere between – it's incredible – somewhere between 35 and 50
percent. And I think in Europe we're probably looking at
something like 10 percent again.
Paul Walsh: Okay. Understood.
Emmet Kelly: So, we're growing in Europe,
but we're way, way behind as a starting point. And it feels like
the others are pulling away. The other big change I'd highlight
is the Chinese are really going to accelerate their data center
growth this year as well. They've got their act together and
you'll see them heading probably towards 30 gigs of capacity by
the end of next year.
Paul Walsh: Alright, we're out of time. The
TMT Edge is alive and kicking in Europe. I want to thank Emmett,
Lee and Adam for their time and I just want to wish everybody a
great day today. Thank you.
(Applause)
That was my conversation with Adam, Emmett and Lee. Many thanks
again to them. Many thanks again to them for telling us about the
latest in their areas of research and to the live audience for
hearing us out. And a thanks to you as well for listening.
Let us know what you think about this and other episodes by
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