Inside an Equinix data center in Silicon Valley Equinix
Inside an Equinix data center in Silicon Valley

Are Virtual Cross-Connects Equinix’s Friend or Foe?

Interconnection giant’s execs address Wall Street’s concern that virtual fabrics like Megaport may eat into its bread-and-butter cross-connect business.

DCK Investor Edge

The emergence of SDN-enabled network fabrics appears to have changed the interconnection playing field over the past year. These fabrics are making it easier for data center providers to offer customers local, regional, and global connectivity options.

This has led investors to wonder if software-defined network fabrics built by the likes of Megaport and PacketFabric, which provide easy access to multiple locations from a single port, will reduce demand for physical fiber cross-connects inside data centers. Industry analysts are increasingly asking this question of late, concerned with a seemingly slowing growth rate of the high-margin product in the third quarter.

Interconnection Revenue Trends

Equinix, the global interconnection leader, has close to 10,000 customers colocated in 200 highly interconnected data centers spread across 52 markets. It reported having 294,000 physical cross-connects in its facilities in the third quarter, as well as 13,000 virtual connections on the proprietary Equinix Cloud Exchange fabric by 1,300 customers.

Equinix

Its interconnection revenue in the Americas grew 8 percent year over year, compared to 25 percent in Europe and Middle East, and 17.8 percent in Asia-Pacific. The slower growth rate in the Americas isn’t surprising – North America, which is responsible for most of the revenue from the region, is the most mature market.

Organic interconnection growth is also facing a headwind from industry migration from 10 Gigabit Ethernet to 100GbE. Existing customers don’t need as many ports after upgrading. This headwind will taper next year, Equinix management said on the third-quarter earnings call.

Barclays TMT Conference Update

This week, Equinix VP of interconnection Bill Long and VP of investor relations Katrina Rymill discussed network architecture trends at Barclays Global TMT conference in San Francisco and added some color on the impact they expect interconnection trends will have on business going forward.

"Will the historic high-margin and strong ecosystem enabler of interconnection continue to deliver the same value for Equinix in the future?" asked one Barclays analyst. The secular interconnection tailwinds will continue, but "how it manifests might change a bit," Long responded.

The analyst, Amir Rozwadowski, pressed on: "If we put it more bluntly, some investors are concerned that factors like the rise of software defined networking or interconnection and increased adoption of public cloud architecture will diminish the benefits of direct interconnection. Do you agree with that?"

Here are some highlights from Long’s response:

  • The market has not qualitatively changed, he said. Customers care about three things: who they connect to, how well connections perform, and what they cost.
  • SDN fabrics are just networking by another name and have a similar cost basis.
  • Equinix’s own SDN-enabled ECX Fabric has three to five times more connections than any other fabric out there, Long said.
  • People are predominantly using virtual connections to access public cloud providers. Equinix has not seen physical cross-connects shrink as a result of cloud. Both virtual and physical cross-connects are growing in number.
  • Over time, he believes, there will be a transition toward more SDN, because customers like the convenience of provisioning virtual cross-connects.
  • The economics of SD-WAN varies depending on network and customer negotiations in an open fabric like Service Exchange. Equinix can adjust pricing of access to its global data centers using its own backbone as part of the ECX fabric.
  • As a customer’s data throughput increases, it can become impractical to use an SDN fabric, as latency becomes an issue. For larger circuits, latency can make virtual connections not viable.

Investor Edge

Enterprise continues to be the fastest growing vertical for Equinix – and public cloud providers are the magnet. Rymill emphasized that cloud adoption by enterprises is a key growth driver for the company.

"Cloud is pulling them [enterprises] out of the basement," Long said. In other words, access to fast, secure cloud on-ramps is drawing new enterprise customers to Equinix, and many of them tend to “land and expand” over time, including both data center capacity and cross-connects.

That public cloud is a friend to retail colocation, not foe, may be counterintuitive, which may be the reason for some of the recent weakness in shares of Equinix and its competitors.

Meanwhile, it remains to be seen how the economics for virtual connections compare with dedicated, physical cross-connects over time. This is something investors should watch closely.

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