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How to Win in a World Dominated by Amazon and Equinix

A prominent investment advisor says there is still plenty of opportunity for smaller players.

It may not be early innings for investment in the data center services sector, but it’s certainly still early in the game. That’s according to Peter Hopper, co-founder and CEO of DH Capital.

“There’s lots of opportunity in the sector, maybe as much as there’s ever been,” Hopper said in an interview with Data Center Knowledge.

New York-based DH is an influential investment advisory firm in the space. If you can think of a major deal in the world where colocation, cloud, and managed hosting all meet, chances are DH was involved. Among recent transactions, the firm had its hand in Peak 10’s acquisition of ViaWest, in Digital Bridge’s Databank and Vantage deals, in CyrusOne’s acquisition of Sentinel, and in the equity investment in Packet by SoftBank and Dell. Its list of transactions goes as far back as 2001, when the company was founded.

While markets for raw infrastructure services, such as data center space in top markets and Infrastructure-as-a-Service cloud, are dominated by the likes of Equinix, Digital Realty, Amazon, and Microsoft, Hopper sees lots of opportunity for other players who can provide differentiated, highly automated infrastructure services and data center space in Tier 2 and Tier 3 markets, where demand for edge computing and caching capacity is exploding.

“What you can’t be is just kind of me-too,” Hopper said, commenting on the futility of trying to compete with the dominant players directly or offering a mix of run-of-the-mill colocation, cloud, and managed services.

Highly Automated Cloud

While Amazon Web Services and Azure continue reporting rapid revenue growth quarter after quarter, a handful of smaller cloud infrastructure players are managing to grow nicely by providing highly differentiated innovative services.

These are the likes of Packet and DigitalOcean, each of whom is a cloud infrastructure service specifically targeting developers but in its own way. Another cloud player with an emphasis on automation is Vultr, whose global cloud platform makes it quick and easy not only to spin up cloud infrastructure resources but also to deploy popular applications, such as WordPress sites, game servers, or developer environments.

Managing Complexity

There’s also huge opportunity in helping enterprises move their complex workloads to the cloud, Hopper said. Rackspace’s recent acquisition of Datapipe targets exactly that opportunity. Your typical bank, manufacturer, or insurance company needs a lot of help modernizing its technology infrastructure. They want to use Amazon Web Services or Microsoft Azure, but their legacy environments are so complex, they struggle managing that transition on their own.

These customers need help setting up, managing, and securing hybrid environments, which Hopper sees as a multi-year opportunity for vendors like Rackspace. “It’s not Amazon’s business model to sit down in a highly concentrated way with an enterprise and say, OK, let’s talk about your 150 applications that you’re running inside your company,” he said.

Amazon’s business is to provide “raw materials” and as much automation as possible. But for an enterprise to get to where it wants to be, “somebody needs to sit in the middle of that and really make it all work and be that trusted advisor to the enterprise customer; that’s not what Amazon thinks their mission is.”

Secondary Markets

While it’s next to impossible at this point to unseat Equinix from its position as the dominant interconnection and colocation provider in the largest US markets, to date, the giant has not signaled that it has plans to expand meaningfully in places like Denver, Phoenix, or Minneapolis.

As hyper-scale cloud platforms move more and more content and cloud services out to such metros to better serve users there and reduce bandwidth costs, demand for colocation space in in those secondary markets is exploding, Hopper said. Given they can tell a strong connectivity story, smaller data center providers in places like that are well positioned to take advantage of this trend.

In addition to connectivity, data center providers today have to have a strong focus on driving down build costs and streamlining design, Hopper said, calling out CyrusOne as the company that’s “really set the bar” in that regard. “They think of themselves not unlike General Electric building jet engines,” he said of the data center provider. “The hyper-scale guys, while they’re consuming huge quantities of megawatts, they’re very focused on driving their costs down as much as possible.”

Record Consolidation

As the market matures both in top-tier and secondary regions, consolidation is rampant. The space saw a record volume of acquisitions in 2016, and industry watchers predict that 2017 will beat last year’s record.

In Hopper’s view, the consolidation trend is a function of several factors.

Acquisitions are usually accretive for strategic investors -- larger players who are trading at good multiples and have access to lots of capital gobbling up smaller competitors to grow revenue.

And the really good acquisition opportunities are quickly drying up. “I think there’s a scarcity value that’s crept into the market’s consciousness in terms of remaining independent platforms out there that really matter,” he said.

Another factor has to do with hyper-scale data center customers – the cloud platforms – who are now looking to reduce the number of data center providers they have to deal with. “Some of the consolidation is driven by the customers really wanting to have a smaller number of vendors in the future,” Hopper said.

While they want more than one or two providers, they don’t want 10. When cloud demand began exploding a couple of years ago, cloud providers were willing to deal with lots of landlords to keep up, but now that they’ve gotten their arms around it, they’re starting to “rationalize their relationships,” he explained.

As hyper-scalers and colocation giants chase enterprise IT dollars, smaller players who play their cards right and identify specific enterprise needs the giants aren’t satisfying still have plenty of runway in the market. Those competing with the giants in “raw materials,” such as dedicated server providers for instance, have a “real tough road to go,” Hopper said. “There are just better offerings out there.”

The opportunities are primarily in providing highly connected real estate in markets that aren’t already flooded by the biggest players and in helping enterprises gear up for the future.

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