Urs Holzle, Senior Vice President for Technical Infrastructure at Google, speaks on the Google Cloud Platform during the Google I/O Developers Conference at Moscone Center on June 25, 2014 in San Francisco, California.(Photo by Stephen Lam/Getty Images)

Urs Holzle, Senior Vice President for Technical Infrastructure at Google, speaks on the Google Cloud Platform during the Google I/O Developers Conference at Moscone Center on June 25, 2014 in San Francisco, California.(Photo by Stephen Lam/Getty Images)

Will Hybrid Cloud Vanish Into Thin Air? Data Center Execs Weigh In

Corporate CIOs and CTOs are wrestling with how to balance cost, performance, security, and compliance, while retaining flexibility and control of increasingly complex IT stacks.

These are a crucial questions which investors, corporate decision makers, and industry professionals must consider carefully prior to deploying the next round of capital.

A Real World Example

In the case of Juniper Networks, the company set a target for a zero data center footprint for corporate IT in order to innovate faster and improve how corporate applications functioned.

Between 2011 and January 2016, Juniper went from 18 data centers to just one with less than 60 racks, replacing most of its internal IT infrastructure with a variety of cloud services and gaining significant cost savings and better efficiency as a result.

Read more: How Juniper IT Went from 18 Data Centers to One

Is this an anomaly, or a glimpse into the not too distant future?

Industry Experts Weigh In

Will the hybrid cloud fade away over time as enterprise customers continue to migrate existing workloads and launch new applications specifically designed for the public cloud?

Data center REIT analyst Vincent Chao asked the question and received three different answers from presenters at the recent Deutsche Bank Media, Internet, and Telecom conference.

Don’t Bet the Farm On Hybrid

DuPont Fabros Technology CFO Jeff Foster felt that the hybrid cloud is just a temporary solution along the way to public cloud adoption.

DuPont Fabros management team is now under the leadership of CEO Chris Eldredge, who took the reins last year after coming over from NTT Communications. Eldredge and the board concluded that the 100 percent wholesale data center approach was the right answer for the company after it briefly tried a mixed business model, offering both wholesale and retail coloscation space.

Foster shared that retail colocation was a business that could fade away over time, as more workloads continue to migrate to the public cloud. However, he was also quite candid in pointing out that not pursuing a retail strategy was partially a function “of the hand that was dealt.”

DuPont Fabros runs a lean operation with just 113 employees, which contributes to sector-leading operating margins. Foster estimated the company would have to hire four to five times the headcount in order to provide retail product and service offerings. That just isn’t in the cards.

Read more: DuPont Fabros Firing on All Cylinders: Time to Step on Gas?

Notably, DuPont Fabros has also tweaked its business model away from 100 percent triple-net leases in order to compete for large cloud deployment “RFPs” from the likes of Amazon Web Services and Oracle.

Hybrid Isn’t Going Away

QTS Realty Trust CIO Jeff Berson believes enterprise hybrid cloud architecture will be a permanent part of the IT landscape. He shared a well-known public cloud CEO’s view was “…the only enterprise businesses that could be 100 percent hosted in the cloud were the ones that were designed from scratch to operate in the cloud.”

However, Berson is actually agnostic as to how IT architecture will evolve over time. QTS offers a full range of products and services, including a suite of in-house cloud and managed services to go along with wholesale and colocation offerings.

Cloud options help to create an inflection point, which drives legacy deployments toward third-party data center environments, according to Berson. QTS employs engineers to help enterprise customers migrate from legacy data centers or integrate with public cloud providers.

Berson mentioned that QTS’s leasing success has been driven by cloud deployments, including the top eight top public cloud providers. Additionally, some cloud providers look to wrap products around the FedRAMP compliant QTS Federal Cloud, in order to access that market.

Read more: QTS Managing for Long-Term Growth, Expanding in Seven US Markets

Berson sounded quite confident that hybrid cloud architecture is here to stay, and enterprise customers will always need customization, compliance, and support.

Solutions Vary By Vertical

Digital Realty Trust presenters included CEO Bill Stein, CFO Andy Power, and CTO Chris Sharp. This team of executives felt that whether hybrid cloud solutions are permanent or just a stepping stone was highly dependent on the enterprise vertical market.

Content and social are at one end of the spectrum, where a large percentage of customer deployments are outsourced to public cloud providers.

DLR - Mar2016 s25 snip DCK

Source: Digital Realty – March 2016 presentation

On the other end, financial services and healthcare customers have significant regulatory and compliance hurdles. Stein felt that customers in the financial vertical will never trust 100 percent of data to the cloud.

Digital believes that storage underpins the hybrid cloud environment. The Telx acquisition allows Digital to provide colocation solutions next to existing large-footprint storage and compute nodes.

Digital currently has all of the product offerings that it needs, because it partners with customers like IBM, AT&T, and Equinix to provide hybrid solutions for enterprise customers.

Read more: Digital Realty Leans on IBM, AT&T to Hook Enterprises on Hybrid Cloud

Stein felt that Digital’s global footprint, and consistency of product offerings and documentation helps to give them a leg up on most of the competition.

International Update

Singapore remains Digital’s hottest international market, with 100 percent of existing inventory leased at attractive margins, and considerable interest in the next phase from existing customers. Stein described the London metro as being “pretty strong,” with Amsterdam “picking up,” as well.

Digital is seeing interest from all of the public cloud providers in expanding across the EU geography. Stein was asked about a possible Interxion acquisition, and likelihood of acquiring any of the eight Telecity data centers which EU regulators require Equinix to divest prior to closing.

He responded three parameters must be met: 1) Strategic fit; 2) All acquisitions must be accretive to earnings year one; and 3) An acquisition must be “leverage neutral,” (meaning that there will be no games played with using more debt to make a potential acquisition look more attractive).

Want to know how data center providers did in the fourth quarter? Curious about investing in data center companies in general? Visit the Data Center Knowledge Investing section for everything you need to know about this high-performing sector.

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About the Author

Bill Stoller is a financial writer/analyst, seated at Wall St. & Main St. where real estate intersects trends in: technology, retailing, office/industrial, residential, healthcare, energy infrastructure & green initiatives. He covers REITs, real estate and related technology, as well as fintech and real estate crowdfunding. He has written hundreds of investing articles which can be found on Seeking Alpha, Benzinga, Motley Fool, and Investopedia, Finviz and Yahoo! Finance. He often writes about data centers REITs -- a new and growing asset class -- attempting to bridge the gap between technology & traditional REIT investors. You can follow @REalBillStoller on Twitter, Seeking Alpha (http://seekingalpha.com/author/bill-stoller) articles, Tools4Investing (https://www.facebook.com/Tools4Investingcom) on FB, LinkedIn (https://www.linkedin.com/in/realbillstoller), and Google+ (https://plus.google.com/+BillStoller/posts). Bill is a real estate veteran with over 25 years of industry experience, including: general contracting, commercial, office and industrial development. He served as Vice President - Energy Services for Mechanical Services, Inc., a leading mechanical contractor in Central and Southwest Florida, and 1997 Contracting Business magazine Commercial HVAC Contractor of the Year. MSI is now a subsidiary of EMCOR Group, Inc. a Fortune 500® leader in mechanical and electrical construction, energy infrastructure and facilities services.

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