Colocation and Data Center Worlds Collide

October 8, 2014

Last month while interviewing a candidate, I described how two data center sectors were coming together like “Worlds Colliding.” Channeling the intensity of Seinfeld’s George Costanza, I explained how we’ve arrived at a pivotal point in data center evolution and how we’re witnessing the colliding of the retail and wholesale data center worlds. I went on to present the job candidate with my Seinfeld-esque “Independent George” view of the industry.

Colocation – The Early Years

Most early data centers were built by equipping office buildings with generators, UPS systems, and raised floors. In the mid-'90s, companies began outsourcing by colocating their servers in purpose-built facilities. This gave rise to the term colocation, and offerings from AboveNet, Digital Island, Exodus, Colo.com and many other telcos.

Network connections were expensive in the early days of colocation, so providers built data centers close to, or inside, carrier hotels. Power was billed by circuit, irrespective of use, and providers offered support services to help rack and stack machines. By the late '90s, companies were buying colocation at unprecedented rates, and data centers were built on speculative demand. Internet companies fixated on the speed of deployment in an effort to capture "unique clicks," the new measure of success.

The Bubble Burst

Colocation providers were decimated when the dot-com bubble burst. I was working at Cable & Wireless in 2002 when we acquired the bankrupt Exodus data centers. I remember visiting one of the facilities in Santa Clara and walked into an eerily quiet section of raised floor. Abandonment hung in the air. Servers that were typically lit and humming sat dark and quiet in lifeless cages. It was a difficult time to be in the data center business.

The fallout lasted for several years. When the technology sector finally roared back, customers deployed more sensibly and providers were more diligent about checking credit. The surviving blue-chip internet companies soon needed entire buildings (single-tenant data centers) to host their IT infrastructure, and the average colocation footprint swelled to address the insatiable appetite for compute and storage.

Wholesale vs. Retail Colocation

A few years back, industry analysts informally divided the industry into "wholesale" and "retail" segments. Retail was generally used to describe cabinets or cages, whereas wholesale referenced 250 kW to multi-megawatt deployments. Wholesale buyers treated their data center purchases like real estate transactions, and involved commercial brokers along with their internal finance and real estate groups. They also placed less value on remote hands support and network connectivity. Metered power would quickly become the standard wholesale pricing model to align actual costs with usage

In the early 2000s, Digital Realty identified wholesale colocation as an underserved market and grew its portfolio of customers needing large data center footprints. On the retail front, Equinix had similar success by targeting customers who valued remote hands, product standardization, and network connectivity.

Worlds Colliding

Around 2009, a fundamental shift in the industry occurred. Retail customers became wise to paying for flat-rate power circuits with only 50% utilization and began demanding metered power. Commercial real estate brokers previously only seen in megawatt deals came down-market to represent customers needing a 100 kW cage. The difference between retail and wholesale was narrowing.

Next, Digital Realty (the industry’s largest wholesale provider) acquired retail-friendly properties, including the 365 Main Street facility in 2010; embraced the Open-IX network movement in 2013; and began interconnecting its data centers in 2014. Around the same time, Equinix (the industry’s largest retail provider) evolved by offering metered power to attract wholesale customers, and in 2012 the company announced its intent to pursue REIT status, which had previously been done by wholesale providers. The lines between wholesale and retail had blurred.

So what happens when worlds collide? I guess it depends on your perspective. Wholesale providers must retool their offerings to address a wider audience of customers. Retail providers must accommodate larger deployments to retain growing customers. And customers, the real winners, will have more provider choices, metered power options, rich network connectivity, and on-site support. This is an exciting time to be in the data center business.

I'm not sure if my enthusiasm or analogy struck a chord with the candidate. After all, it has been 16 years since the Seinfeld finale and my references to "the show about nothing" are sometimes lost on younger applicants.

Yada, yada, yada. I'm still looking for a salesperson. And the wholesale and retail worlds continue to collide. In the end though, this disruption has led to more options for data center clients. And that's a good thing.

Bryan Chong, vice president, mid market

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