Author: Vinay Nagpal, Associate at Portman Partners
The Datacenter industry is one of the very successful stories of the digital age we live in. The global data centre market size is expected to reach revenues of around $174 billion by 2023, growing at a CAGR of about 4% from 2018-2023. Datacenters store the valuable data that our lives are so dependent on. The focus on developing a digital economy is one of the primary factors attributing to the increasing demand in the global data centre market.
There have been numerous speculations and questions raised about various datacenter models over the years such as:
- Is the retail colocation model going to be extinct?
- If all hyperscalers and OTTs build their own data centres, is the wholesale model sustainable?
- Will the Cloud erode the outsourced data centre model?
- Will the Edge eat the Cloud?
The answer to all of these questions make for a very interesting discussion and to say the least the answers surely may differ depending on the person’s vantage point, who is answering the question.
One of the largest data centre REIT (Real Estate Investment Trust) was DuPont Fabros Trust, that got acquired by Digital Realty Trust (another datacenter REIT) in September of 2017. The answer to the question that whether the wholesale data centre business model (such as of the companies like DuPont Fabros, Digital Realty) is sustainable in the long run is – absolutely YES! That doesn’t necessarily mean that it will exist in its current form.
Let’s take a look at Wholesale vs. Retail. Typically, Wholesale model has been 1MW and up, however the trend seems to be going downmarket to 250kW of critical power. In a Wholesale model typically, the customer brings in their own cabinets/racks, servers and networking equipment and is responsible for the management of that equipment.
The data centre operator is responsible for the management of the building, and the electrical, mechanical and (to some extent) connectivity aspects of the facility. The type of lease typically depends on the availability of capital and the experience of the facilities operations team. The type of datacenter leases in the Wholesale model is – Triple Net (NNN) and Full-Service Lease.
Triple Net is a predominant leasing model wherein the operators charges a fixed base rent and the operating expenses, direct electric and cooling are a pass-through of the actual costs. Wholesale providers offer Full-Service Leases as well at times primarily to attract new customers wherein the operating expenses are lumped into the base rent and offer predictable billing to the customer. The customer typically takes on more risk in a Triple Net model compared to a Full-Service lease.
A Retail / Colocation model typically comprises of the data centre operator providing cabinets/racks, cages and is catered to smaller customer requirements wherein the data centre operator is expected to provide a higher level of connectivity and managed services than a Wholesale provider, but of course the management of the electrical and mechanical components of the building rest upon the data centre operator. In a Retail / Colocation model the datacenter provider typically charges based on cabinet/rack space and power circuits, with additional charges for other Managed Services and Cross Connects.
As more and more hyperscalers, OTTs and Cloud providers – who are the largest buyers of wholesale and super-wholesale datacenter space are building their own data centres around the globe, which question has become more and more prevalent that will the rise of hyperscalers building their own data centres ultimately make the wholesale model fade away?
The Time-To-Market is so important in this industry that both the wholesale model and the largest consumers of wholesale space building their own datacenters space is expected to co-exist for the foreseeable future. The price wars that we continue to see in the wholesale sector continue to compress the margins and could perhaps slow the growth in the years to come.
Another burning question in the enterprise IT and in the outsourced world has been that will the Cloud providers erode the outsourced datacenter model.
No, the Cloud providers will not only not erode the outsourced data centre model, but in fact, with the corporate enterprises being more and more open to the idea of moving their IT workloads to the Cloud, we are seeing enterprises move their corporate enterprise IT in a mix or a hybrid environment comprising of the Cloud and Retail Colocation, and at times the Cloud, Retail Colocation and Wholesale environments. Mostly the network nodes or routers are kept in a Retail Colocation environment within an interconnection-centric colocation company that provides a dense ecosystem of carriers, Internet Exchanges and other managed services providers for the customer to interconnect with.
Another trend that is underway and is moving the workloads from the Cloud and on to the Edge is the ‘Edge Data Centers’. This is an extremely important concept to move the content closer to the end-user with improved performance and reduced latency.
The Edge compute model is driven by a variety of applications and use-cases to name a few – Internet of Things (IoT), Augmented and Virtual Reality, Autonomous Cars and Machine Learning. Ultimately as the connections between the ‘things’ in the IoT and us humans will continue to increase, this will drive increased use of real-time decision making and interactions between various devices, and between humans and devices and ultimately driving the exchange and usage of data even higher. With such strong market drivers, the shift to Edge represents the most profound change that will impact possibly for decades to come. It is predicted that globally over the next 5 years the number of connected devices will rise to an astounding 25 billion devices with 50 billion installed or embedded sensors. If you ask someone today the definition of an Edge Data Centers, you can rest assured that will get a varied definition primarily based on the users’ vantage point – somewhat similar to what was the case with defining ‘Cloud’ about five or so years ago.
The fundamental and foundational difference between a Cloud compute environment and an Edge environment is that Cloud emphasizes largely on centralization of data and achieving economies of scale, the Edge emphasizes on de-centralization of data and having localized copies of data accessible for the users in a fast(er) and low-latency manner.
While it is expected that with the continued explosion of data and Internet-enablement of everything around us, the use of data and new models of accessing larger volumes of data fast and faster will continue to evolve, the fundamental datacenter models such as wholesale, retail colocation, Cloud will continue to co-exist. The models such as build-to-suit and power-based shell also continue to find their own niche use-cases and grow but at a much slower pace. Ultimately it is the users’ way of accessing the data and the business model of the enterprise that will drive their selected datacenter model, but more often than not, we will continue to see a hybrid mix of data centre models in the deployments worldwide.