Where will edge computing investments go?

At the beginning of 2020, edge computing seemed to be at the peak of hype. So is there any reality to all this hype? Industry expert Chris Barraclough and consultant Matt Bamforth of STL Partners sought to analyze investments across the edge computing value chain to determine how mature the market is.

Why is there so much edge computing hype?

For those in the telecommunications and technology industries, early 2020 seemed like we were at the peak of edge computing hype. But could this simply be a proximity bias? The reality of the edge computing wave is different than expected.

There have been many announcements in the edge computing ecosystem that have been hyped. Microsoft announced in 2018 that it would invest $5 billion in IoT and edge computing over four years, and continues to increase its efforts in edge computing development and applications; HP also announced that it would provide $4 billion in funding for edge computing technology over four years starting in 2018. Google and AWS are also doing this. Apple invested $200 million in January 2020 to acquire Seattle-based Xnor.ai, a startup focused on providing artificial intelligence capabilities at the edge. In addition to investments and mergers and acquisitions, hyperscalers are also working closely with telecom operators who can provide facilities and connectivity. Recent announcements of edge computing deals include:

• AWS and Verizon have partnered to deploy AWS Wavelength at an edge site in Chicago;
• Vodafone is working with AWS to provide edge solutions to developers in Germany and the UK;
• Deploy Microsoft Azure at the edge of AT&T's virtual 5G network;
• Alibaba has entered into a strategic partnership with China Tower Corporation to leverage its 1.9 million tower base in China.

That said, edge computing still lags far behind other tech terms in terms of search volume and ad appeal (measured by “cost per click”). AI, blockchain, 5G, IoT, cloud computing all have high monthly search volumes, though they rank slightly lower on that metric, while network functions virtualization and software-defined networking both have high costs per click as the other terms mentioned previously.

Where will edge computing investments go?

Here are five major pools of funding that are flowing into edge computing:

• Early-stage and higher risk – venture capitalists and private equity (PE);
• later-stage and lower-risk infrastructure funds;
• Public cloud providers looking to leverage the assets of telecom operators (and others);
• High-tech companies are looking at edge computing as a new opportunity or a role to support their existing business;
• Telecom operators themselves want to establish a position beyond basic infrastructure.

Examples of companies in the four major marginal funding pools

In terms of where capital is going, multiple stages of the value chain are likely to attract investment. STL Partners’ Edge Computing Ecosystem Tool breaks the edge computing ecosystem into seven segments, from tools to hardware to software (cloud computing infrastructure and applications/software).

Investment levels are relatively low, but this could change

If one focuses on the funding and investment announcements recorded in the 2019 STL Partners “Edge Computing Ecosystem Tool”, it will indicate the scale and nature of the money “flowing to the edge”.

The 30 companies in the ecosystem vehicle have collectively attracted about $3 billion in funding, a small amount compared to the roughly $60 billion in annual capital investment by Amazon, Microsoft, and Google, much of which has flowed into hyperscale data centers. The three companies that received the most funding, DataBank, xVchnge, and CompassDatacentre, are all focused on the facilities portion of the ecosystem, building integrated edge data centers and colocation facilities in the United States.

Other larger investments include investments in established cloud computing software companies that are looking to extend their solutions to the edge, such as Docker and D2iQ (formerly Mesosphere). Of the remaining 25 companies, 16 are categorized (in the ecosystem tool) in the application/software space. So while capital spending has increased in the “facilities” portion of edge computing, more companies are seeing investments in application/software. Many of these are early investments in companies with “point solutions” that will seek to expand or merge their offerings as they attract more capital. Solutions offered by these companies include enterprise AI, cloud native platforms, pipeline machine learning, and industrial IoT, among others.

Edge investments are still small compared to investments in hyperscale cloud computing

Some telecom operators are looking to build and provide platform services themselves, rather than relying on hyperscalers or other third parties. Deutsche Telekom has co-funded MobiledgeX (not in STL Partners' Edge Computing Ecosystem Tool), a PaaS startup that aims to develop an aggregation layer to link together edge computing locations from different telecom operators and provide a seamless service for developers. MobiledgeX is signing agreements with SK Telecom in South Korea, Telus in Canada, NTT Docomo in Japan, Deutsche Telekom in Germany, and other telecom operators around the world.

Funding into the edge computing ecosystem has been relatively modest for much of 2019 and is expected to grow slowly until 2021-2022, when a large influx of late-stage funding will occur as the market matures.

Although 2019 seems to be full of hype, this is not a bubble that will burst anytime soon. As the market grows, investments in edge computing will accelerate in the next few years, and we will see competition between different stages of the edge computing value chain.