If Digital Realty Trust successfully closes its industry-record acquisition of the European data center heavyweight Interxion, it will shrink Equinix’s lead in European markets substantially. But that won’t be the case on a global basis.
On Wednesday, commenting on his two rivals’ deal, announced a day earlier, Equinix CEO Charles Meyers said the combination would be logical, acknowledged – vaguely – its game-changing potential in Europe, and pointed out his company’s overwhelming dominance in the global retail colocation and interconnection market.
“I think there's probably merit in the deal and an industrial logic to it,” he said on the company’s third-quarter earnings call. “I think it's a bit of a stretch to say that the combination really meaningfully closes the gap in terms of trying to replicate the scope, scale and value of Platform Equinix.”
Combining Digital Realty and Interxion, “just mechanically, let alone operationally, financially, and culturally, will certainly be nontrivial,” Meyers continued. “And even if and when that's done successfully, I think … what comes out at the other end is a company we'll feel pretty comfortable competing against, certainly in Europe, which we've been doing, obviously, for years, and in particular on a global basis.”
The $8.4 billion transaction would give Digital, the world’s second-largest data center provider that's traditionally been focused on the wholesale market – building massive data centers and leasing large spaces and power capacities to clients long-term – the second-largest share of Europe’s retail colocation market.
Retail colocation and interconnection services – where network carriers and other service providers lease small footprints and pay for the ability to link their networks inside its data centers – have been Equinix’s specialization since birth and continue generating nearly all its revenue.
In 2018, Equinix had 22 percent share of the $1.2 billion EMEA retail colocation market, Jabez Tan, head of research at Structure Research, which tracks the global data center market, told DCK.
Digital Realty’s 2018 retail colocation revenue in EMEA was about $200 million, or 4 percent market share, Tan said. The source of most of that revenue, he pointed out, are the eight former Equinix data centers Digital bought in 2016, after European antitrust authorities forced Equinix to divest the assets as a condition for approval of its acquisition of TelecityGroup.
Adding Interxion to the mix, with its 13 percent EMEA market share, would give Digital 17 percent of the market, Tan said, bringing its share much closer to Equinix’s 22 percent than today.
Globally, however, the transaction’s impact would not be as transformational. Digital Realty’s colocation business outside EMEA is about one-tenth the size of Equinix’s, Meyers said. Tan confirmed that 10 percent was in line with Structure’s estimate.
But there’s a more strategic angle to Digital’s Interxion acquisition than the EMEA market share. While continuing to grow, primary data center markets in the US and Western Europe are well developed, and analysts, financiers, and data center providers anticipate much higher rates of growth in the emerging markets in Latin America, Eastern Europe, Africa, Middle East, and Asia.
Interxion controls – and sells – access to 14 submarine cables that land in Marseille, linking Europe to Africa, Middle East, and Asia. That makes its Marseille data centers highly attractive for companies wanting to serve the increasingly connected populations in those regions.
San Francisco-based Digital, which dominates the global wholesale data center market, first started encroaching on Equinix’s retail colocation territory in 2015, when it acquired the US colocation and interconnection heavyweight Telx.
It has since continued building out its offerings in that space, but with its own twist, making the case that network-dense interconnection hubs like Telx’s and Interxion’s are a lot more valuable when tethered to hyperscale cloud nodes of the kind that occupy its wholesale facilities – the likes of Microsoft Azure, Amazon Web Services, or Google Cloud Platform.
As large enterprises seek to outsource their computing infrastructure, they find that while a lot of it can go to the cloud, some of it needs to stay under their control. That latter portion can go into a retail colocation facility, where, conveniently, enterprise networks can get direct, private links (“onramps”) to one or several massive cloud nodes nearby.
While the two companies continue to work together – Equinix is a big Digital Realty wholesale tenant – Equinix also hasn’t shied away from encroaching on its “coopetitor’s” bread-and-butter space. Last year, it launched an initiative to build large data centers specifically to accommodate large leases by the hyperscale platforms.
Earlier this year, it formed a joint venture with GIC, the Singaporean state-owned investment fund, which will finance construction of the hyperscale facilities.
Notably, the man leading Equinix’s hyperscale initiative, called xScale, is Jim Smith, who cut his teeth in the wholesale market in his previous role as CTO at Digital Realty.