Colocation Outlook 2014: Connectivity is Critical in a Changing Landscape
December 30th, 2013 By: Rich Miller
Data center connectivity is becoming a key differentiator as wholesale data center providers compete for customers with colocation companies. As the industry heads into 2014, the blurring of lines between “retail” colo and wholesale space is leading more providers to offer flavors of both products, and boosting interest in open internet exchanges that could extend peering activity to a broader spectrum of facilities.
The ability to connect with multiple networks has always been a key selling point for facilities in major markets, leading to the creation of large ecosystems of carriers, content providers and network services in key geographic hubs like northern Virginia, New York and Silicon Valley.
Are the boundaries between retail and wholesale data center services blurring, or becoming more distinct? That often depends upon who you ask, and what they’re selling. What’s clear is that competition for customers is intensifying, spanning boundaries and offering end users a growing array of choices for deploying their IT equipment in third-party data center space.
First, let’s define the market:
In colocation, a customer leases a smaller chunk of space within a data center, usually in a caged-off area or within a cabinet or rack. In the wholesale data center model, a tenant leases a dedicated, fully-built data center space. The wholesale data center model offers greater control and security than shared colocation space, but it’s not a fit for everyone. The economics of wholesale space initially were most attractive to companies requiring at least 1 megawatt of power capacity for their data center. Over the last two years, that boundary has shifted, with some wholesale providers now courting deals as small as 250 kW.
Some industry executives say the distinctions are becoming less relevant.
“I have never once had a customer approach me and ask me for wholesale data center or retail data center space,” said Gary Wojtaszek, President and CEO of CyrusOne. “Although we discuss our business in this way to help our investor audience understand our company, we don’t fundamentally think about the products in this simple two-state way, because our customers don’t. Our customers are trying to solve a specific data center problem.”
Yet these models exist because they create meaningful differences in how data center space is priced, paid for and supported.
“Retail (colocation) is a service industry with a lot of handholding,” said Chris Crosby, the founder and CEO of Compass Datacenters. “If you sell a megawatt of power on the wholesale side, it’s a different business.”
Broader Product Mix for Many Providers
A growing number of providers are offering both “retail” colocation and wholesale suites, including CoreSite, CyrusOne, QTS, Digital Realty, RagingWire and Equinix.
“We’re seeing strong growth in both (retail and wholesale),” said Doug Adams, Senior Vice President and Chief Revenue Office of RagingWire. ”There is truth to the idea that they’re blurring. The determination has always been the size of the oportunity and the length of the deal. The tipping point for what defines a wholesale deal used to be 1 megawatt, but it has definitely dipped down into the 250 kW range. We’re differentiating on the quality of the infrastructure and high reliability.”
Digital Realty, the largest player in the wholesale space, projects 20 percent annual revenue growth from colocation in the next three years, with colo revenue hitting $140 million by 2016. Equinix, the market leader in colocation, has launched a “business suites” product in northern Virginia and will soon expand the offering to its New York metro facilities.
Lines Are Brightening, not Blurring
Equinix and CoreSite are among the providers drawing a distinction between network-dense interconnection facilities and “undifferentiated” data center space to support large server installations.
“It’s interesting that many people have talked about blurring the lines between wholesale and retail,” said Charles Myers, Chief Operating Office of Equinix. “Frankly, I’d argue exactly the opposite. As the market segments, the choice for people to move large, non-performance-sensitive applications into wholesale is becoming an easy choice for them at the price points that wholesalers are offering.
“These undifferentiated deals that close at low price points simply are uninteresting to us,” said Myers. “It is true that some wholesale players have retail offerings or are signaling their intent to develop retail offerings. But in my mind, that’s not a blurring of the lines. That’s an entirely different matter, and that decision by a wholesaler would come with a very significant investment required to support a large number of retail customers. All you have to do is look at our employee count, look at our (expenses) necessary to support that retail model and compare that to pure wholesalers, and I think you’ll very quickly conclude that (wholesale) players can’t just declare themselves as retailers and expect that they’re going to successfully meet customer needs.”
The blurring has been happening for at least the past three years as all deals got fewer and far between and when the validation from Digital Realty came that their wholesale tenants were slower to take up space, combined with their deliberate entry into the colocation end of the business the blurring was undeniable.
Anyone with inventory (conditioned power and 3+ carriers) wanted to do a deal. This created tension with wholesale players offering colo, since many of their existing customers were colo providers and no matter what, the landlord always has the upper hand on price.
In general, this colo vs. wholesale vs. cloud vs. *aaS points to where we see the market going with our clients. It’s where it has been headed for at least the past 8 years – a utility.
If we peel back of the segmentation, acronyms, and other ‘definitions’ we try to use to explain the data center business at the end of the day the data center business is about providing more reliable electrical and telecom infrastructure than electric utilities and telecom companies are designed to provide on their own, apart from each other. Why? Because computers didn’t exist 100 years ago.
We see a day in the not too distant future where the CIO pays for both electricity and network costs as a function of their role in a company vs the facilities people get the power bill and purchasing the telecom bill. Instead of keeping the lights on the CIO keeps the lights blinking. With our growing reliance on computing the reliance upon power and network connectivity has more value. As a utility it has the responsibility and burden of getting more reliable and less expensive like the computing equipment driving its use and consumption. Computing is the next utility.
So the more we look at drivers for making predictions in the next ________ (insert whatever unit of time or measurement you like) remember this:
1. We have an intrinsic unit of measurement built into every piece of the data center business – cash
2. The future of the data center is driven by how important the stuff that goes inside it is to its users
To that end, those who understand how to drive out cost, increase reliability, and exploit the differences between the buildings and the stuff that goes in them get it.
I would agree with Chris that “uptime is the coin of the realm” but we don’t share the same definition of “uptime”. Uptime to a wholesaler means power and cold air. Uptime to the end-user means power, cold air AND network. AWS outages are mostly network related but make no mistake they are outages. The era of “we are carrier neutral, you can bring in anyone you like, but we aren’t going to do it for you” is ending.