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Investors beware – Moore’s Law could smash data centre operators

Mr Gordon Moore, one of the co-founders of digital technology company Intel Corporation (NASDAQ: INTC) observed many years ago that the capability of an integrated circuit board doubles approximately every two years thanks to technological advances.

Moore’s observation has since become known as ‘Moore’s Law’ and broadened to refer to the capabilities of many digital devices including processing speed, pixels and memory capacity to roughly double every 18 months.

Moore’s Law is also strongly linked to the price of electronic goods. As can be easily observed by a trip to your local Dick Smith Holdings Ltd (ASX: DSH) or JB Hi-Fi Limited (ASX: JBH) store every couple of years, both firms must overcome deflationary pricing pressures.

These trends are having a profound effect on possibly the most exciting and talked about areas of IT at the moment – cloud computing. Synonymous with cloud computing is data centres (DC). DC are the backbone infrastructure required so that governments, corporations and individuals can reduce their individual hardware needs and migrate to the cloud.

The positive growth profile of cloud computing, has in turn has led to a boom in DC service providers with a number of telecommunications firms including Telstra Corporation Ltd (ASX: TLS), Macquarie Telecom Group Ltd. (ASX: MAQ) and Amcom Telecommunications Limited (ASX: AMM) all building and operating their own DCs to provide services to Australian clients.

However these local players are not alone, there are some serious global heavyweights too. Google Inc (NASDAQ: GOOG), Microsoft Corporation (NASDAQ: MSFT) and Amazon.com, Inc. (NASDAQ: AMZN) are all operating DCs and providing a wide range of services to Australian customers.

Recently it was reported by tech sector news site ARN that both Amazon Web Services (AWS) and Google have recently cut the prices on many of their cloud services. According to Amazon AWS has undertaken a price cut more than forty times in the past eight years. The price per gigabyte at AWS’s Singapore DC is reported to be dropping from US$0.094 cents per gigabyte per month to US$0.03 cents per gigabyte per month – a hefty reduction! The price reductions are all thanks to Moore’s Law and the decreasing cost of hardware. Companies like AWS are experiencing reductions in the cost to serve and in turn passing these savings on to their customers through lower pricing.

Foolish takeaway

While Telstra might be large enough with the economies of scale to stand up to the firepower of these global giants, shareholders in smaller telcos will need to keep a close eye on developments in the sector or risk facing some serious write-downs. With such speedy drops in price by the majors, smaller players risk being caught with older, more expensive equipment that they can’t earn a profitable return on.

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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