Data centres are hot property, and not just for the returns

They are all competing hard against a similar push by big US tech companies. Microsoft announced last October it would ramp up the number of data centres it owns or leases here to 29, adding to Amazon’s Web Service $13 billion investment in new data centres locally and to Google’s “cloud regions” of leased data centres in Melbourne and Sydney.

Other big Australian investors are interested in the global story. Last September, AustralianSuper paid $2.5 billion for a minority stake in Vantage Data Centres which owns hyperscale data centres in Europe and the US.

The growth in data storage, and the exponential rise to come, is putting more stress on Australia’s creaking electricity market. Little wonder data centres all have back-up diesel generators in case of power shortages.

Advances in cooling systems technology and reticulation mean the massive amount of fresh water previously needed daily to keep the facilities cool enough should no longer be the same major environmental issue in newer data centres.

But increasing concerns about cybersecurity mean data “residency” or “sovereignty” – having sensitive data all stored in Australia – is now considered a strategic advantage for many corporates as well as a requirement for many government departments.

The catch, as Tudehope points out, is that almost all AI services today are delivered from the US, the home of US tech companies.

“There’s almost no data residency right now in a lot of AI. All the data you put into the AI function is now stored in the US,” he says. “It’s starting to change in the last little while but right now it’s all in the US.”

This is important, he says, because the laws and the regulatory bodies that apply stem from the jurisdiction in which the data is stored.

“A lot of people would be surprised to find they are caught by foreign laws and foreign regulators when all they did was just join a cloud,” he says. “So where the data resides has significant consequences.”

The fact that every email sent on Gmail can ultimately be read by Google or that personal data stored in, say, India is ultimately subject to India’s rules and regulations may not bother most individual users. For business users as well as governments, however, it is an increasingly delicate issue given the need to avoid any added security risks.

Australia’s AI opportunity

Tudehope has an obvious interest in data centres being located in Australia. But he says this also represents an opportunity to participate in the entire AI value chain as a critical future industry for the country.

“When you have cloud and AI services in Australia, you bring highly skilled jobs and a whole new level of engagement in the digital economy, not simply just buying services from sales offices or online,” he says.

“Now is the exact time for Australia to grow this sector as it is emerging. ChatGPT is a fantastic product but it’s just one of the many AI models out there. There is incredible innovation in niches that are really exciting and you don’t need to be in Palo Alto to embrace that.”

For Tudehope, this doesn’t mean government tech parks or infrastructure but a combination of funding for early stage start-ups and later stage businesses to create momentum and build critical mass.

“Once they are successful, the free market will kick in,” he insists, suggesting the government’s $15 billion National Construction Fund as a potential suitable model.

But that’s precisely the problem for the fund and for the Albanese government, of course.

Many sectors want the fund, or other government programs, to provide taxpayer assistance. The critical minerals industry is just the latest crying out for help as its ambitions are buried by low prices.

What they all have in common is the argument their industries or even individual businesses require temporary help in exchange for growing the Australian economy long term.

This used to be derided as “picking winners” and it went out of fashion in Australia decades back. It is now trending again in a big way. Choices to come.