It is what it is....

Sunday, April 06, 2008

Data Centers are the Economy

The dependence on the data center today is far deeper and wider than it was in 1999. How could it not be? The Internet is no longer just another source for information threatening print, radio and television. It is THE source for information, THE source for education, THE source for communicating with individuals or to populations, THE source for commerce and trade, THE source for entertainment and THE source for a recession proof economy. At the heart of it all is the data center. The data center provides the platform which is enabling a more equitable distribution of wealth across a global stage.

Assuming this is all true, which I certainly believe it to be, there should be an epic flow of resources directed towards the buildout of the data center platform. Guess what...there isn't. The largest investments being made today are coming from Microsoft and Google. Give them credit. For all the grief the two of them take, they really "get it." And they've been rewarded financially for "getting it." But what about the innovation that is a result of the fresh ideas and new ways of doing things? Google and Microsoft no longer possess such innovative ways yet they own a large percentage of the platforms which enable such innovation. How many startups challenging MSFT, GOOG and AMZN are going to be comfortable hosting their secrets on the very companies they are trying to dethrone? I doubt too many.

There is a huge misconception that a glut of data center space is on the horizon. The fact is that perception is ill conceived and those who believe it and make investment decisions are ill informed and quite possibly passing up a once in a lifetime investment opportunity. Don't misunderstand my point of view, yes, there has been a fair amount of new data center builds announced and in some cases started but if you go back and look at some of the recent ones they are rarely don't on spec...ie, the risk is minimized and the inventory rarely hits the retail supply. Take a dive into the SFBA market and examine Digital Realty Trust's two most recent builds in Santa Clara. Both were pseudo started on spec but were both completely sold out before being finished. In both cases they were leased to single occupants...ie, they got two new customer orders out of them. Not two new customers as both orders were singed by existing customers, but two new orders. Hardly a speculative build when you know your existing customers are about to hit a wall in terms of their available capacity and you can lead them down a golden path to expand in facilities operated by a vendor they already do business with....oh and which happen to be the only place on the West Coast where they can walk into such a situation. In the same market and right around the corner from DRTs two sold out locations there is Equinix, formerly the leader in speculative builds. Equinix is expanding its existing Santa Clara facility by around 40k sq ft and if it chose to could have the entire thing sold out today. Since their target customer isn't a 40k ft requirement and since they're in an enviable financial position, they can be choosy about who they sell the space to and find customers who will pay them top dollar for their product. This definitely won't be a startup as they are too cost sensitive and aren't worthy of extending large amounts of credit to in the form of inventory....Equinix has been there and done that and learned from the past. What about the rest of us? What about the major consolidation at both the state and federal government level which is far greater than anyone anticipates? What about the major efforts going on in enterprises across the US which all require data center facilities which are far more robust than what is currently available to them?

If data center capacity is not available for these and many more types of requirements it is a serious threat to the growth of the economy and only positions the big guys more favorably than anyone should be comfortable with.

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7 Comments:

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