Undeterred by the beating some of them are taking in the media, tech giants continue pouring billions of dollars into infrastructure, expanding the data center footprint that underpins everything they do.
This has created a boom for data center developers best positioned to deliver megawatts upon megawatts of capacity in places Facebooks and Googles of the world need it most. It’s caused some big players who haven’t been as well positioned to win this business to significantly alter their models.
Flexential, one of the two largest data center providers in secondary North American markets, is latest to jump on the bandwagon. Formed last year following the $1.67 billion merger between Peak 10 and ViaWest, the company’s focus has been on retail colocation, interconnection, and managed and professional services. But Flexential is now adding a wholesale product to the mix, so it can go after larger deals, expecting to then upsell those customers on its other, more hands-on services.
“We basically just want to be talking to a broader demand set,” Chris Downie, the company’s CEO, said in an interview with Data Center Knowledge. Downie wants to be a player in the market segment “that’s fueling a lot of growth for our peers.”
While the wholesale product is aimed at hyperscale clients (among others), Flexential isn’t aiming at hyperscale-size deals that have been fueling growth for the likes of Digital Realty Trust, CyrusOne, and CoreSite. Downie describes hyperscale requirements as 10MW and up, while Flexential is offering wholesale data center space starting at 250kW. Basically, he said, “We don’t want to turn away 2MW deals.”
That’s similar to the deal size targeted by Equinix’s recently launched wholesale-like product. The world’s largest retail colocation and interconnection provider has formed an entire new business unit to go after hyperscale customers with data center requirements that are below the typical mega-size lease but well above what qualifies as retail colo.
To Flexential’s benefit, there are few locations where it competes directly with Equinix, which mostly targets primary markets. Flexential’s wholesale offering is available in 14 of the 21 markets it’s in. Among those, the overlap with Equinix is only in Atlanta, Dallas, Denver, and Philadelphia. It’s also unclear at this point where Equinix plans to offer its new product beyond the initial Paris 8 site that’s currently under construction.
Not to Flexential’s benefit is the fact that TierPoint, its nearest and biggest competitor, has a similar set of services, including hyperscale. Another close competitor in terms of product mix is QTS Realty Trust, although its footprint also doesn’t overlap with Flexential’s to the same extent as TierPoint’s. A more extreme example of a data center provider restructuring to better position itself to go after hyperscale deals, QTS competes with Flexential in Atlanta and Richmond, Virginia.
Edge and Otherwise
According to Downie, the primary demand driver for this type of product in secondary markets is the need for hyperscalers to bring their storage and compute infrastructure closer to end users.
“There is demand now, and I think we’ll see increasing level of demand,” he said. “Tier-two markets in our view are very much coming into their own. There will be a larger focus on the ability to be closer to those fast-growing population centers.”
The “content distribution nodes” hyperscale cloud platforms are deploying in secondary markets – also known as “edge” data centers – tend to be 500kW or greater, Downie said. The platforms use them to lower network costs and improve performance of their products for customers in the regions they’re deployed in.
According to Downie, Flexential already has many such nodes deployed by the large social, mobile, content, and SaaS companies throughout its footprint. Second-tier cloud providers also use its facilities for this purpose, he said.
A list of existing and prospective clients Flexential provided to Data Center Knowledge includes a “social media” company with a 1MW requirement across Colorado, Nashville, and Philadelphia. Flexential didn’t provide the clients’ names, disclosing only their size in terms of annual revenue. The social-media customer’s size is $27.64 billion, according to the document, which is about the same as the amount of revenue Facebook reported for 2016.
The wholesale product is also aimed at more traditional enterprises, which have large corporate offices in the regions Flexential is in and are in need of data center space near those offices. One of the customer requirements listed is a 590kW deployment in Raleigh, North Carolina, for a “global software company” with annual turnover of $2.41 billion. That’s about the annual revenue Red Hat, the Raleigh-based enterprise-software giant, reported for 2017.
Other entries on the list include a $1.66 billion “IT infrastructure, analytics, and content provider” with a 1.37MW requirement in Oregon or Colorado; a $23 billion “multinational e-commerce, retail, internet, AI, and tech conglomerate” needing 1MW in Oregon; and a $60 billion “national logistics company” with an 800kW data center requirement in Colorado and either Plano, Texas, or Nashville.
An Attractive Business
Flexential isn’t planning any deviation from the market in terms of wholesale pricing, which today ranges from $95 to $130 a kilowatt per month depending on power density (more power per square foot usually means lower price per kW). The company’s cost to build this product is between $8,500 and $10,000 per kW, again depending on density, amenities, and infrastructure redundancy, Downie said.
The wholesale price per kW charged to the customer is just the price of space and power. It doesn’t include connectivity, which is typically added on top, or any other services Flexential expects to sell to wholesale customers. “We have more to upsell to that footprint,” Downie said. Besides network connectivity and interconnection, those services, delivered by a team of about 60 engineers in the company’s professional services division, can be anything from helping clients design the physical data center layout to managed compliance, security, and cloud onramps.
There’s a lot to like about the wholesale business for a data center provider. Because this type of product doesn’t require as much high-skilled labor as managed services or other higher-level services companies in this market sell, it drives higher profit margins.
While revenue per square foot is lower, wholesale customers lease more space and have stronger incentives to renew. “You have to price more aggressively, but you get larger footprints,” Downie said. “Ultimately, these larger deployments come with longer-term contracts, longer-term growth profiles, and kind of a stability.”