DuPont Fabros to Enter Colocation Market
February 3rd, 2014 By: Rich Miller
DuPont Fabros Technology is entering the colocation market. The company, which has operated as a “wholesale” provider selling large suites of finished data center space, will begin selling space by the cabinet in the next few months. DuPont Fabros (DFT) made the announcement in its earnings call last Thursday.
DuPont Fabros will start small, dedicating about 800 kilowatts of capacity in its data centers in northern Virginia and New Jersey to colocation space. This will represent a beachhead for what could become a larger colocation business in the future, said President and CEO Hossein Fateh.
The move reflects the growing competition in the market for outsourced data center space, which has led both wholesale players and “retail” colocation providers to expand their service offerings. 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.
Open-IX Enables New Strategy
DFT’s entry into colo is enabled by the emergence of the Open-IX movement, which has led two European Internet exchange operators to launch local peering hubs in the company’s facilities. The London Internet Exchange (LiNX) has taken space in DuPont Fabros’ ACC5 data center in Ashburn, while Amsterdam’s AMS-IX will open a Open-IX exchange in the NJ1 data center in Piscataway, N.J.
The presence of these Internet exchanges will allow colocation customers to easily access a wide range of networks, instead of having to arrange their own connectivity.
“We believe this is a good opportunity to step into a cabinet-based offer, where customers can lease one or more cabinet, connect to fiber provider of their choice and to one of the Open-IX switches and subscribe to our Level 1 IT support, should they need assistance,” Fateh said on the earnings call. “This initial launch will allow us time to build out the infrastructure needed to support a robust retail product, while taking a prudent approach into this offer. We expect to have our cabinet-based offering on the market in the second quarter of this year.”
Starting Small, But Scenarios for Growth
Services offered to colo customers will include “rack and stack” installations, server reboots, shipping and handling of equipment, network cross connects and cabling.
“It’s going to be a very small operation,” said Fateh. “In Virginia, we’re talking less than 40 racks. We’re hiring a couple of people to do this, but at the moment, we don’t envision it to be a large part of our business at all.”
But that may not always be the case. In 2017 through 2019, DuPont Fabros will have up to 13.8 megawatts of leases coming up for renewal in its ACC4 data center in Ashburn.
“We want to be really ready for a retail product so that when and if some of those lease has come up in ACC4, we’ll be able to re-lease some of that” as colocation space, Fateh said. Shifting to a colo model would produce a better return than leasing that space to “super wholesale” customers, who have large requirements but can often negotiate for attractive lease rates.
No surprise here. I feel like a broken record saying ‘a deal is a deal’ but it’s true. I have said for at least 3 years that the data center business is turning into a commodity business.
Data centers are buildings where computers turn electricity into heat.
Whether you have one cabinet, one cage, or one megawatt. With so many companies entering the wholesale market over the past 10 years, that was where the action was and big deals got done. Then the market shifted. I’m not suggesting there aren’t the whales out there, but they are fewer and further between. If they weren’t, why chase cabinets as a wholesale provider?
Other factors play a role too. Cloud came into its own. Smaller and denser racks meant older building strained to keep up with cooling and the power required for the added overhead. Going big or going home for 500,000 square feet meant bigger carry costs for longer periods of time for wholesale players. There is only so much flexibility you can put in a lease to balance carry costs. Unless you get into colo.
I suspect that Digital’s move to colo was to cannibalize stranded power that wouldn’t neatly make up a Pod worth of capacity. Now they are going into ‘Enterprise’ which means mid-market. I think it’s a smart move having sold to the mid market for years – they want the same things as the F500 they just don’t do it at scale. And there are a lot more mid market companies than the F500.
So expect that every data center company will move ‘down market’ and go after smaller deals is the news here. It’s still a cabinet going into expensive real estate and if a provider can make a few bucks he wasn’t making last month on a few cabinets they bought anyway, well then, that’s business.
Where the chafe will be is on the colo renewals. Colo companies that used the wholesale providers used to avoid competition because if you were ‘wholesale’ it meant you didn’t do deals under 1MW. Now it’s every man for himself and the colo companies are now competing with their landlords – exactly what they DIDN’T sign up for.
If my clients asked me what to do, I would tell them straight up – shop. Unless it is 2x+ the cost to move, look around. Consider a new architecture – can you get two smaller denser locations for the same or less and increase your resiliency? Can you tap into more carriers? Can you streamline operations by having more control over how your kit is deployed. Your cabinets are a commodity. Think about making the move. There are other less competitive options out there.
doug fultonPosted February 4th, 2014
Spot on Mark.
I see the conflict of interest, and one thing I think you missed was the growing pains for moving down market. different tech needs, different materials to be ordered, and often more complicated. (even though smaller)
It wont be too much longer until the cloud becomes a commodity as well. Just takes time in any tech business for it to happen.
x2 Mark. With added comments: these big wholesalers are REITs, not colo companies. They can sell “colo-like” contracts, but they are BY DEFINITION, “A security that sells like a stock on the major exchanges and invests in real estate directly, either through properties or mortgages.”, They are investments or real estate companies. As an owner of REITS, The Wizard certainly has no desire for my REIT to own a boatload of 10 cabinet deals…and neither will the other investors.