Ayotunde Coker, CEO of Open Data Access Centre (OADC), told TechCabal that the increasing number of submarine cables means that a lot of big data will be captured and require massive storage capacity. This is responsible for the renewed deployment of capital into hyperscale mega data centres in the country. The companies currently building hyperscale data centres in Nigeria include Kasi, Rack Centre, and OADC. 

Kasi Cloud Limited began construction of its hyperscale or Tier IV data centre, modelled after the Silicon Valley technology parks, in 2022. The facility, worth $250 million, will be located in Lekki, Lagos, and is expected to go live in 2024. 

Rack Centre, a Tier III data centre company, started building a 12-megawatt IT data centre at Ikeja, Lagos in 2023. The data centre is situated on a 20,000 square metre green field site and sits at over 30 metres above sea level. 

Construction of OADC’s hyperscale data centre began in 2022. The company is building a data centre with a capacity of 24 megawatts of power. 

“You will see that from the end of this year, the facilities with hyperscale spec will become available, almost like every quarter into the year after. It is like the tipping point is happening,” Coker said.

Before now, most investors have built Tier III data centres, the second-highest certification in the Uptime Institute’s system of classifying data centre performance into four tiers. Tier III data centres such as MainOne Data Centre and Rack Centre offer additional reliability over Tier II in the form of N+1 redundancy and multiple power and cooling distribution paths. 

Hyperscale data centres have much larger capacities and infrastructure. These facilities are massive business-critical facilities designed to efficiently support robust, scalable applications and are often associated with big data-producing companies such as Google, Amazon, Facebook, IBM, and Microsoft. Hyperscale data centres usually exceed 5,000 servers and 10,000 square metre.

South Africa built the first hyperscale data centre in sub-Saharan Africa seven years ago. In Nigeria, companies like Google, Microsoft, and Facebook stored some of their data with data centres like MainOne, but the majority of their data storage needs have come from outside the country. A MainOne spokesperson told TechCabal that it had been providing storage for companies like Google and Microsoft. 

There is also an increase in the construction of other tiers of data centres. In March, Airtel broke ground on Nxtra, a data centre with a total capacity of 180 megawatts distributed across 13 major data centres and over 48 Edge data centres. Medallion also recently expanded its data centre facility to add a three-floor building with 1 megawatt of IT capacity and 232 racks. 

So far, the eight subsea cables that have landed in Nigeria include MainOne cable with a capacity of 10tbits; ntel’s SAT-3 with 800gbits; Globacom’s GLO-2 12Tbits); Africa Coast to Europe Cable System with a capacity of 5.5tbps; WACS (14.5tbits);, Equiano (144tbits); the Nigeria Cameroon Submarine Cable System (NCSCS) with capacity of 12.8tbps; and 2Africa (180tbits).

Cloud computing costs are charged on a pay-as-you-go basis, with startups paying monthly for the computing they use. Startups also pay for backend and mobile application computing costs. These costs can vary widely depending on the company.  

In late 2023, Incentro, a Google partner, sued Twiga, a Kenyan e-commerce startup, and asked a court for help in collecting a debt relating to a $2 million cloud services contract. According to the terms of that contract, Twiga could pay as much as $84,000 per month for cloud services. 

While that is already substantial, currency devaluation and FX volatility in Nigeria, where many startups earn revenue in Naira, make that fee even more expensive.

In mid-2023, Nigeria removed all artificial controls on its FX market to unify its official and parallel market rates. While the CBN was hoping for stability, the value of the naira has continued to slide, reaching new lows this week. 

As a result, a $1000 cloud service that would have cost ₦458,000 in early 2023 is now about ₦1.52 million, a 107% increase.

One Nigerian HR-tech startup that runs different servers for its client pays up to $80,000 in cloud costs monthly, according to a person familiar with the company’s operations. Another Nigerian financing startup pays around $2,000 monthly, an employee who asked not to be named told TechCabal.

Nonso Eze, the CEO of Tradebuza, whose startup connects smallholder farmers to financing, said his company is exploring given the rising cost of their USD-denominated cloud fees. 

The big three cloud providers

Amazon Web Services (AWS), Microsoft Azure, and Google Cloud Platform are the three biggest cloud computing companies in the world. They remain the top choice for many companies and offer free cloud credits to early-stage and growth-stage startups. Google, for instance, gives startups up to $200,000 in Google Cloud credits to startups through its Black Founders Fund, while accelerators like Techstars and Y Combinator give their portfolio companies cloud credits. 

When the cloud credits eventually get exhausted,  the startups will have already built some of their core infrastructure on the cloud and are locked in, making it difficult to switch.

Abolore Salami, a founding partner of Business Lab Africa (BLA) and a long-time AWS customer, says there has never been a downtime in over five years of using the cloud provider, emphasising the stability expected from cloud providers. 

In January, Salami put out a poll on LinkedIn to find out how many founders were also affected by rising cloud costs. More than half of the people who participated in the poll said it was worrisome. 

Is “going local” viable?

A seemingly obvious way out for startups is to transfer these costs to their customers, but the fear of churn in competitive markets makes this a challenging choice. 

Adedeji Olowe, CEO of Lendsqr, a lending-as-a-service company, told TechCabal that startups could seek out local alternatives that have built some resilience into their infrastructure. Some local players include Nobus Cloud Services, MainOne Cloud, Web4Africa, Galaxy Backbone, Layer3 Cloud, and many others. Indian-based Zoho Cloud is also positioned as a local alternative because it accepts naira payment. 

While local options exist, there are concerns about their ability to replicate the full feature range of big cloud providers because they don’t own their infrastructure and rely on open-source platforms like OpenStack, a cloud expert who asked not to be named told TechCabal. 

AWS, for example, offers microservices—which break down a large application into smaller independent parts.

“When you don’t have complex infrastructure, providing cloud services won’t be as easy as people think it is,” he said.

Sales of cloud services are slowing down in North America the world’s biggest cloud market. Amazon’s cloud computing unit has been particularly affected and is losing market share to Google Cloud and Microsoft Azure among others. Africa is one of the global regions where a significant portion of demand for cloud services is expected to come from. According to digital research consultancy, Xalam Analytics, demand for cloud computing services in Africa is growing at between 25% and 30% annually. This compares favourably with Europe where compound annual growth rates (CAGR) is estimated at 11.27% between 2023 and 2028. In North America, the figure is 10.34%.

Elastic cloud computing is the technology at the heart of cloud computing. Elastic computing refers to virtual server programs that allow users to rent units of storage space, network connectivity, and computing power from clusters of data centres globally. Created by a small Amazon team in Cape Town, South Africa in 2003, the service that has become AWS, Amazon’s largest subsidiary accounted for half of Amazon’s operating profit in 2022 and helped reduce heavy losses incurred by Amazon’s e-commerce business, investments and movie streaming platform last year. AWS has been described as Amazon’s profit engine. But this profit engine is slowing down in the most developed markets and showing signs of promise in smaller markets that are rapidly adopting digital technology.

African banks, insurance companies, airlines and airports are moving their data and IT systems to virtual servers and shuttering costly self-operated data centres. Even telecommunications giants in Africa like MTN Group are not left out. In March, the telco announced it had deployed the core service for its 5G service on Microsoft’s cloud platform Azure. South Africa’s Old Mutual, shut down its physical data centres to move its workloads almost entirely to the cloud. At TechCabal’s Moonshot conference, Osahon Akpata, Ecobank’s Head of Consumer Payments, noted that the pan-African bank was progressively moving assets to cloud platforms. African startups which continue to raise billions in funding from investors are naturally built on cloud platforms.

Potential market built on a handful of big spenders

While Africa represents an opportunity for cloud service providers, the market is still small. The German research service, Statista predicts that revenue from public cloud services in Africa will reach ~$8.3 billion by the end of 2023. By comparison, public cloud revenue in India last year reached $6.2 billion, market intelligence firm International Data Corp reported.

Unlike more mature markets where cloud services like AWS face growing competition, slowing investment into technology startups will not significantly affect the growth of cloud computing services in Africa. “Our priority customers are enterprise businesses with deep pockets and $100 million in annual revenue,” a cloud engineer at AWS told TechCabal. Startups are a distant second in terms of revenue, and video streaming is beginning to make its mark in cloud service demand. Senior AWS staff who spoke with TechCabal say digital content including video streaming from local media outlets, like Arise News, is helping grow demand for cloud services in Nigeria. But the big cloud service providers have not cracked Africa’s public purse yet. 

Governments are hesitant to move data to public cloud platforms. On-premise data systems or contracts with smaller cloud service providers continue to dominate government cloud spending. Moreover, new data localisation rules threaten to constrain the private cloud market, where some of the biggest customers are financial institutions. Concerns about data localisation requirements were partly behind AWS’s decision to open a Local Zone in Lagos earlier this year.

A race to win early market share

In their latest report released during Mobile World Congress in Kigali in October 2023, the GSM Association (GSMA) says smartphones will account for 88% of total mobile connections in Africa (with the exception of North Africa) by 2030. In the same year, they expect 200 million new unique mobile subscribers to join the growing number of Africans who use mobile phones.

The variable but growing use of digital platforms for government services, private businesses, and personal life in Africa is forcing IT companies to find dynamic ways of serving this demand. Cybersecurity concerns and the ability to quickly ramp up services to respond to brief spikes in service demand increase this pressure. 

For example, when a central bank demonetisation program forced Nigerians to use digital money transfer options earlier this year, the money transfer services offered by Nigerian banks were frequently down and failed transactions were a common complaint. Fintechs with cloud capability were better able to handle the spike in digital transactions and grabbed valuable market share as a result. 

As digital financial services providers and other technology startups begin to become an embedded part of African economies, cloud platforms are in a race to grab market share. Almost all of AWS’s staff in Lagos—about 20 in total—are involved in sales and marketing. Flutterwave recently announced a 5-year partnership with Microsoft that will see the $3 billion (at last valuation) fintech process payments for its global merchants on Azure. Oracle, on the other hand, is leveraging its existing relationships with clients who use other Oracle products to cross-sell its cloud service. Last year South African retailer began the process of moving its digital operations to Oracle’s Retail Merchandising Cloud Services. The retailer shed its internal inventory management system for the costly change which was completed in March 2023. 

“We needed to modernise our retail infrastructure and leverage cloud technology to establish a sustainable and stable application foundation for our high volume processes,” Kim Sim, Chief Information Officer, Mr Price said. “Our vision is to be the most valuable retailer in Africa and we know that Oracle’s proven cloud platform can help us meet the needs of our growing community.”

The transition to the cloud did not come without cost – all ERP implementation projects typically do. Earlier in the year, the retailer acknowledged that the switch negatively impacted its revenue for the full year ending April 2023.