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.

The Datacenter Cheat Sheet: One size doesn't fit all

Choosing a datacenter is no trivial task. For the majority of sophisticated companies, the days of the one stop shop are history. This wasn't the case seven years ago when you weren't fired for choosing Exodus as your provider of datacenter services. It wasn't uncommon to add redundancy to your colo'd environment by installing gear in multiple Exodus facilities. Maybe one on the West coast and one on the East and you were a hero. Today Exodus is no more albeit some of their remnants remain with Savvis and Digital Realty Trust and a fresh crew of cautious datacenter providers have stepped up to the plate, each with a focus on fulfilling some market need. What could have possibly changed in the market to have such dramatic implications in such a short period of time? Networks(backbones, last mile options, overlay). Hardware got smaller but more dense. Software as a service is real. Ubiquity in access speeds and availability. Efficiency enablement...if there is such a phrase. Increase in demand for electicity. Access to capital. While all those don't need to be crossed off on everyones check list for most companies embarking on the discovery process of finding the right colo vendor, the bricks of the road for which we traveled.

The past two years have brought a change in the way datacenter vendors charge for the services they provide to customers. There was a time when you could compare the costs of doing business with one vendor to the other by their cost per rack or cabinet. If you're doing that today you could be in for a big surprise. In fact, if the first question your prospective vendor asks you is, 'how much space do you need?', you should consider making a bee line for the closest exit because the vendor should be telling you how much space you need based on your power requirement.

For most providers, a rack takes up 25 square feet of datacenter floor space. The issue is that floor space isn't all created equally. The 'players' today have varying power densities ranging from 60 watts a foot to 200 watts a foot. Thus, the rack in the 60 watts a foot facility provides less than 1/3 of the utility(in an economic sense) as the rack in the 200 watts a foot facility. I'm getting sidetracked but felt those were important points to make considering the newness of the industry in general and the lack of a standard unit of measure amongst vendors. I will dive deeper into the power issue and how to really compare one vendor vs another in my next post of power. And it may shock you. Sorry, couldn't resist :)

For simplicity, I will break down the buy side market and evaluate each section the way the supplier, not the buyer, would. We'll go generic and call the three sections:


Small(up to 100kw) - both in footprint(space) and power consumption(<3kw per rack)
- Customers in this category may have a requirement for a rack or two, perhaps up to ten. Power required for each rack is a single 20amp circuit and perhaps a redundant circuit as backup to the single 20amp. At 25 feet a rack and ten racks, this customer has a requirement of 250 sq ft and approx 30kw of power. This customer likely isn't as concerned with the cost of power as they are with the proximity of the datacenter to their office. The exception to that last statement would be with carriers and isp's who colo in carrier neutral sites as they tend to have relatively low power requirements and do most of their management via remote login.


Medium(between 100kw and 500kw) - in this category the vendor is most likely telling the customer how much space they'll need. Reason being, not all sites are equal. Example, a customer could go to Equinix whose pre 2007 sites are built to around 120 watts a foot and be told they need to purchase 125 cabinets worth of floor space in order to support their power requirement. In this example the customer may only need 50 cabinets with 10kw in each one. That is only two 208v 30amp power circuits per cabinet, or 100 power circuits total but the capacity on those circuits are 5kw each(actually 4.9kw at 80% of their gross capacity). This is a standard, run of the mill setup for companies like eBay, Amazon, Google(albeit different circuit types but roughly the same total kw per rack), Salesforce, Youtube, etc.


Large customers (greater than 500kw) - In addition to the customers mentioned above, this category includes most of the top 50 internet companies as well as many enterprises that may never colo their gear. The majority of users from this category are not colo'd in third party sites, they build and operate their own datacenters. While there are a handful that overlap(Yahoo, Facebook, Google, eBay, Internap, etc)those tend to be the internet related companies, not the traditional enterprise. I believe this is due to the nature of their growth and the fact that they had to start somewhere which likely was in a colo datacenter such as Exodus, Equinix, AT&T,e tc. Overtime, these types of companies built up their internal expertise in operating the physical components of a datacenter. This provided them them with the skill set to operate their own sites their growing demands for and expenses of outsourced datacenter space made investigating the possibility of building and operating their own sites a no brainer. Since running a datacenter is nothing new and not limited to internet companies, there is an established ecosystem of companies providing services and products to the operators of datacenters. As such, there are companies whose business it is to manage the day to day operations of any datacenter but the one with the asset on the book or the livelihood on the line, still have inhouse expertise in all the areas of design, operations, maintenance, etc. It's way too large of an investment and all too important to the day to day operations of the businesses in general to not have an inhouse staff of engineers and operations experts.

Along with the growth in demand for computing space came the revenue being generated from the services being delivered by the assets in these datacenters. More revenue = More access to capital + greater borrowing power + more flexibility in provisioning + less emphasis on planning + operational transparency to internal customers + increased costs controls + increasing costs of outsourcing = Decision to build, buy or lease and operate datacenter assets.

Before we get into who fits where, it may be useful to first go over why all vendors aren't going after the large customer and why if they do they limit the number of that type of customer to one per datacenter. Vendors want to fill their sites up and just like the buyers, they want to get the most bang for their buck. The difference is the vendors buck is already spent so they must get the most return on that buck. As with most markets, pricing is somewhat volume driven so the more you buy the cheaper it is. There really is no logic to that other than at some point the large customer would be spending enough if he was paying small customer pricing to put that spend towards building his own site and not outsourcing at all. For right or wrong that dynamic just is what it is.

At any rate, lets use an example using a ficticious vendor named XXX, inc. who just opened a 100k sq foot datacenter with 15MW of sellable power. XXX could fit 5000 cabinets in this space and deliver 150 watts a foot. XXX has a good sales team who uncovers two opportunities with prospective customers who have a requirement of 5MW each. In order to get these deals they will need to get real competitive on the pricing structure for the space for these customers, well below their retail rates. Often colo vendors are lured by landing the big name customer and the oomph such an incident would add to effort selling out a site quickly which pleases investors who are more likely to make additional if they can see success on the initial ones. Today, most of the big guys in the market have learned that giving all or most of the buildings resources to a single user are wise to the pitfalls wh customers is that they don't want to buy a bunch of additional services from along with such an arrangement.

The issue is that the you can't mix a large companys requirements with the colo vendors abilities and get a happy outcome because success to one may likely mean failure to another. It isn't so much that the low price hurts the vendors as it is the lack of operational flexibility the customers experience with vendors hurts the customers experience. In doing so, increasing the attractiveness of insourcing. For A perfect storm was in the brewing for a flood of investments being made in ensuring the ability to grow, and grow on your own terms, drive TCO down, less dependency on outside personnel and a bunch more factors, features and functions of running your own datacenter compared to colo'ing in a third party site.

This dynamic doesn't impact the vendors we know and love today as the opportunity cost of servicing a 5000 sq ft customer compared to selling that 5k sq ft to 200 different customers is far too great to not take notice. Assumptions for example: cab = 20sq ft, pricing excludes power, large deal would get 30% discount off retail, a cross connect costs $200 per month, big customers buy 10 cc's and small customers buy three.

Example of revenue generated by single customer in 5k sq ft:

250 cabs X ($560 discounted rate + $2000 for ten cross connects) = $142k
$142K divided by 5000 sq ft = $22.72 in revenue per sq ft


Example of selling the 250 cabs to individual customers:


250 cabs X ($800 per cab + 600 for cross connects)= $280K
$280k divided by 5000 sq ft = $56 in revenue per sq ft

Ahh, the reason it really isn't that good of a deal for a retail vendor to take too many anchor deals, the opportunity cost is huge!

Data Center Cheat Sheet - The Players in the space

If you're looking for a place to put your computer/s because you've determined that your office closet isn't the most conducive place to host your critical business apps, customer facing service platform, customer database, website, or whatever else you're responsible for, chances are you're talking to one or more companies which provide datacenter services. The major national and international players in this space are:

Equinix- pioneered carrier neutral model - risen to the top as the 800lb guerrilla. If you want you own private 'cage' and access to a boatload of carriers and ISPs, you may want to talk to them. North America, Asia Pac, Europe

Digital Realty Trust - best performing REIT in 06 if I recall correctly - customers of DRT typically pay for construction costs of their respective datacenter in DRT buildings. Customers include Equinix, Savvis, Internap, MSFT..basically everyone with the financial wherewithal and domain expertise it takes to make the leap of no return, ie spending the cash to build out core MEP infrastructure. If you want total control of EVERYTHING which mean running day to day operations of the datacenter infrastructure and your computing infrastructure, you may want to have a chat with them. Global reach

Savvis - includes some of the assets of Exodus, Digital Island, Cable and Wireless। Smart and experienced management team. Seems to be focused on more that colo and is 'moving up the stack' so to speak. If you're a customer of IBM or EDS they will be similar in terms of their offerings. If you want a private cage and are planning on running every aspect of your business operations they probably won't be the best fit but what the heck, maybe they can run it better than you. In which case, you may want to have a chat. Global reach

365Main - Carrier neutral, expanding rapidly, solid facilities, find current customers and get their take on overall experience. US based

CRG West - Carrier hotel centric, moving into more of a colo model recently, if you need hundreds of racks of space they probably aren't the best fit but if you need a small physical footprint in terms of space and a leveraged network footprint, they may be worth talking to. Owned by Carlyle Group which could mean they have easy access to capital but who knows how committed Carlyle is to the space. Carlyle was an original investor in Equinix and that didn't turn out as well as it should have for them so they may have less of an appetite for this space than the CRG West sales guy is telling you. US reach.

Terremark - Equinix wannabe and making great strides in removing the 'wanna' piece of it. Expanding in VA and CA, bought DataReturn which was a decent sized hosting provider. Historically built smaller sites in tier two markets with the exception of VA and CA. US reach. Great customer list but pretty much everyone on that list is a customer of all of these vendors.

Switch and Data - Very similar to Terremark but built more facilities than any of the other players, in smaller markets, and with smaller facilities(10K to 15K sq ft). Bought PAIX from Abovenet and in that regard has a great customer list but same attributes as the Terremark list.

Internap - Hesitant to include them but my experience is that they are in most of the deals floating around and are a wholesale customer of Equinix, 365Main and others as well as they do run their own sites which they acquired over the years. Their domain expertise is on the networking side and not on running datacenters but then again if you're in an Internap cage in Equinix who cares?

AT&T - the former T had some decent facilities albeit ones which weren't built to support today's computing clusters and the associated power and cooling requirements. If you work at a small bank in the Midwest and are worried about getting fired for pushing the envelope as it relates to looking outside the box, you should talk to AT&T. You may never get through their onerous contract negotiations so you may get fired anyway. If you do manage to get through and become a customer of theirs, I have a feeling you won't have too much fun second guessing your decision. IBM and T are no longer job protectors to the decision makers they sell to.

Level3 - Was a player in the space 10 years ago which is why I felt compelled and obligated to include them but don't consider them to be a true player any more. Allot changes in 10 years and you can't upgrade datacenters once they peaked out their total design, especially if you have live customers in them.

Where there is smoke there is fire and the fire here is white hot. Fire being the demand for datacenter space. As such, there are a whole bunch of smaller players emerging into the scene to do their best to take down Equinix just as a very young Equinix was trying to do to Exodus. If you're talking to these types companies I would guess that you have really small requirements, really large requirements or aren't dealing with a mission critical application. I state those three reasons not because small regional guys don't know what they're doing(how in the world could I know that?) but because the cost differential between them and Equinix or 365Main is negligible if anything. In fact, it would be logical to believe that Equinix and 365Main would actually be lower priced than a small player due to the scale they're able to achieve in purchasing, operational efficiency and learning curve. "Too small" to me means hosting your code on someone else's servers so that may be a small webhost who runs their own physical datacenter. "Too big" to me means you consume too many resources on the 'Players' building for you to be a good fit with their overall objectives.

If you're scratching your head wondering how could that(too big of a customer for Equinix?) be the case I will explain it in my next post:

- Data Center Cheat Sheet - are we a good fit based on our requirements?

Following that post will be:

- Data Center Cheat Sheet - Power and Cooling Mathematics - you will be shocked! no pun intended :)