Datacom boss on how to beat surging AI costs, questions about local control

“But substantial value can still remain in the local economy.

“The Government has a view as to where ownership of big pieces of industry like power generation, airports, financial services and should sit, and how much of it should be on the New Zealand stock market or New Zealand-owned versus watching profits disappear offshore.

“The data centre economy should be a big piece of that equation. Ensuring that New Zealand benefits, and that taxes are paid here.”

‘Sliding away’

Australian Prime Minister Anthony Albanese recently announced an “Office of AI”, sitting at the centre of things as part of the Department of the Prime Minister and Cabinet. Its brief includes tighter rules around data centres, amid a popular backlash.

NZ Prime Minister Christopher Luxon said he spoke to Albanese and is working on New Zealand’s own guidelines.

“One of those conditions could be a pledge [that] large data centres would bring or invest in additional electricity supply,” Luxon said.

Spark sold 75% of its data centre business, including its planned facility at Dairy Flat north of Auckland, to an Australian private equity firm in a half-billion-dollar deal.

The PM notes Microsoft and Amazon have already helped bankroll new wind and geothermal power here. Luxon said he would like to see a (yet-to-be-detailed) common approach to data centre investment across Australia and New Zealand.

Would Luxon’s guidelines include rules around local ownership, such as those that apply to Chorus’ fibre (which by law is majority local-controlled)?

“That is a question better posed to government than to me,” Davidson said.

“What I would say is, it’s all sliding away.

“It’s being acquired internationally. You’ve seen who’s been building here, and what the ownership structures of that look like, and who’s sold down their data centre assets. We should be asking ourselves really hard, what should that look like?”

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Davidson won’t name names, but Spark recently sold 75% of its data centre business to Australia’s Pacific Private Equity Partners in a half-billion-dollar deal (the final total will depend on performance targets).

Chorus pulled the plug on its partnership with the giant, Singapore-backed Datagrid “AI factory” planned for Southland (which on Friday revealed downsized plans for the international cable that will monetise its compute capacity).

And Microsoft’s giant data centre in northwest Auckland is owned by a subsidiary based in low-corporate-tax Ireland.

Tax reform advocate Nick Miller says most of the “Big Tech” firms bill NZ customers from overseas, or send nearly all their revenue to related parties as expenses, minimising the net revenue that stays in New Zealand and is taxed here.

Ripple effect

Davidson said issues with offshore or offshore-owned data centres and services went beyond data sovereignty and tax.

“For a lot of platforms, there are dependencies on other parts of the world,” he said.

“Disruptions can ripple through to Australia and New Zealand.

“You’ve got everything from CrowdStrike [that US firm that took retail, banking, airline and other systems around the globe offline after a faulty update] to the places where the control planes or logins for any of the big platforms have been disrupted that have rippled around the world instead of just being contained to countries.”

NZ’s advantages include Five Eyes

Davidson is pro data centres. He says New Zealand needs to take advantage of its renewable energy (and ability for data centres to bankroll its expansion), cooler climate and, via our membership of Five Eyes, the fact that we’re one of the few countries that can import all of the latest and greatest silicon from Nvidia and other chip makers.

That’s a natural stance for him to take. Datacom (55% owned by the rich-list Holdsworth family, 45% by the NZ Super Fund) recently bought an East Tamaki data centre originally built by IBM, giving it a stable of five around the country (Davidson says that, from a resilience perspective, others are “too Auckland-centric”).

And he says there’s a place for foreign investment (which the Crown is actively chasing) and the data centres built by the multinationals (almost all of which his firm partners with, to some degree).

But he does want the Crown to show a firmer hand.

“Being overly anti is going to restrict the economy. Being overly positive and permissive could cause harm. Real understanding of the constraints and the potential impacts and the scenarios is needed in the planning process that needs to happen,” he said.

How to deal with increasing AI costs

Increasingly, large organisations are being billed more and more on how much AI they consume (via the number of “tokens” they use for queries and other tasks). The rate is increasing, causing a lot of bill shock next to the lower, set-price per-seat billing model.

Davidson says it’s a matter of choosing horses for courses. His firm is now using a lot of free, open-source LLMs (large language models) for tasks like coding, with the top-shelf, expensive “frontier” models used to review that work.

Similarly, Zespri head of digital operations Tim Lloyd told the Herald earlier this week: “Unless you’re trying to cure cancer or something, most basic AI will do the job for you. People get swept up with Fable or Mythos [two headline-grabbing, cutting-edge LLMs from Anthropic], but ‘good’ is good enough most of the time.”

Some companies are also making use of cheap or free (and increasingly capable) Chinese LLMs for basic tasks.

Datacom is experimenting with a mix of LLMs in various areas of its own business, then applying the lessons to its clients’ workplaces to help them cut costs.

Only 35% have policy about where data should reside

Key findings of the Talbot Mills survey of business and technology leaders:

83% are concerned about offshore data risks, but only 35% of organisations had a formal, written policy governing where critical data should reside and how those decisions are made.Most (64%) said their most sensitive or business-critical data is stored in New Zealand, while a further 21% use a mix of local and offshore storage.At the same time, concern about offshore data risks remains high, with 83% of leaders saying they were concerned about storing data offshore or with an overseas provider.Data breaches were the leading concern, cited by 77% of those worried about offshore storage, followed by legal access by foreign governments (60%).More than a third of leaders (37%) said their organisation was already reviewing its approach to where critical data is stored and managed or planned to begin a review within the next six months.

Davidson said there were a number of wrinkles if a large organisation decides it wants all of its data stored in New Zealand. One is the legal grey area around whether the US government has any reach over data stored in New Zealand by a US-owned provider.

Another is that most already have data stored offshore, “and you can’t just flip a switch to relocate it”. It can be a complicated and expensive process.

Unbuilt data centres: Microsoft and Amazon hit by use-it-or-lose-it deadlines

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A case in point is Airbus, which recently said it would move 70 apps off Amazon Web Services and onto a French-owned data centre and cloud provider.

But the process will take years, and cost €50 million. And it’s just the start. Airbus uses some 900 apps. Then it has 20,000 suppliers, nearly all of which are probably using Amazon, Microsoft, Google and other multinational services.

The tub-thumping shift away from big tech-owned data centres is easier said than done.

Other findings included:

85% of leaders were confident their organisation could continue operating critical services during a disruption to offshore cloud access, network connectivity or a cloud control plane.79% per cent also described their backup strategy as mature. But only 41% had a documented exit or migration plan if their primary provider became unavailable or unacceptable, while just 39% had tested their ability to restore critical systems and data within the previous six months. 13% had never tested their recovery capabilities.The gap was particularly pronounced among smaller organisations. Seventy per cent of organisations with 20 or more employees had a formal policy governing where critical data is stored and managed, compared with just 7% of those employing fewer than 20 people.

Datacom NZ managing director Peter Nelson said the findings point to a gap between awareness and operational readiness.

“Organisations are paying much closer attention to where their critical data sits, who controls the infrastructure it relies on and what would happen if access were disrupted.

“The challenge is turning that awareness into practical action. Resilience comes from having clear policies, tested recovery plans and a realistic understanding of how the business would respond during an outage or disruption.”

Davidson said that many organisations used tohave clear backup testing, but hand lost a handle on things in the age of software-as-a-service.

In terms of artificial intelligence:

Almost half of respondents (45%) said AI adoption had already influenced their data infrastructure and storage decisions over the past year.At the same time, 43% said legacy systems, fragmented data platforms or unclear governance were slowing their ability to adopt AI safely.

Datacom AI director Lou Compagnone said AI ambition is moving faster than data readiness in many organisations.

“The organisations that get the most value from AI [will have] clear access controls and confidence in where information is stored and who can access it” – Datacom director of AI Lou Compagnone.

“Businesses are pushing ahead with new tools, but legacy systems, fragmented platforms and unclear governance are making it harder to adopt them safely and at scale.

“The organisations that get the most value from AI will be the ones that have done the foundational work first – trusted data, strong governance, clear access controls and confidence in where information is stored and who can access it.”

Māori data governance not yet widely considered

The research also found limited consideration of Te Tiriti o Waitangi and Māori data governance principles in data storage decisions.

Only 27% of leaders said their organisation always or often considered these principles, while one-quarter said they were never considered.Larger organisations were more likely to take Māori data governance into account, with 39% of organisations employing 20 or more people doing so always or often, compared with 18% of smaller organisations.There was also strong support for keeping sensitive information under New Zealand jurisdiction, including financial data (63%), customer data (61%), employee data (58%), health data (57%) and intellectual property (56%).Expectations were even higher for government-held information, with 75% believing citizen data should remain under New Zealand jurisdiction, followed by tax and financial records (71%) and defence and national security information (70%).

In June last year, then GCSB Minister Judith Collins opened “Mātai”, a $326m “all-of-government” data centre built on the RNZAF base at Whenuapai.

The most sensitive Government information would be stored at the GCSB-run Mātai, Collins said.

Chris Keall is an Auckland-based member of the Herald’s business team. He joined the Herald in 2018 and is the technology editor and a senior business writer.