In turbulent times, the colocation market seems like a safe harbour. Restricted access to capital is putting large infrastructure projects on hold, users want fixed costs – so goes the mantra.
Companies don’t want to commit to large, capitally expensive, long-term projects. Demand for existing space is growing and those new facilities that are being built, or that will become available over the next 18 months, will fill rapidly.
The logic of this seems indisputable. However, despite all of the positive messages coming from the colocation market, there may be other factors at play. Despite the talk of higher demand, the colocation market remains volatile. Some players are saying that prices are stable; others say prices are rising. Some are making the move into services to protect their revenue and margins, while others say this dilutes the ability to service customers properly.
It may be too early to declare, as some suppliers have done, that demand is outstripping supply and that corporations should commit now before it is too late. But what is clear is that interest in colocation has not been so great for a long time.
Large corporates are not committing to new large-scale data center builds. Unsurprisingly, it is large financial institutions that are being cited as abandoning ownership and control in favour of taking space, power and other facilities from data center providers.
Several issues have converged in the last couple of years, which made hosting an attractive offering. The power to run data centers has increased and office buildings with a campus data center won’t support requirements.
Add to that the cost of real estate and the less expensive and better designed data centers, and companies started outsourcing their data centers more than they used to. Even companies with in-house data centers don’t have the capacity to expand.
On the development side, some of the development companies have put projects on hold and larger footprint customers are seeing fewer viable options.
Long-term deals are becoming commonplace – five-year leases are now the norm. Facilities employees in corporations think of data centers in terms of real estate – they negotiate a flat cost.
But the question is, how far ahead can this be done? A lot of data center people are struggling to price points five years ahead.
If the facility has a certain capacity, they’ll take a larger footprint. The suppliers will allocate power based on space – this has always been part of the business. Pricing by provision has gone, or is going quickly, and most power is being metered.
Customer demands are changing and clients want a higher level of managed services, though this doesn’t mean they want to pay for it. There is more of a pay-as-you-use model being adopted. Instead of signing for a service and paying a monthly premium, it is being paid for on an as-needed basis.
That said, now everyone wants some form of technical service. People have fewer human resources to position remote hands in a data center. They are trying to be creative with how they remotely manage their IT across ethernet and dark fibre.
As for the amount of space on the market, it depends on who you speak with. In colocation terms, anything above 60% capacity is usually considered full. Now there is talk of facilities running at 80% capacity, in part because there is limited capital available to expand existing facilities, or invest in new ones. This appears to be most true in the major US metropolitan areas. Out in the regions, away from the main hubs, there exists space and flexibility driven by the need to fill space.
Currently, colocation suppliers are confident they can ride out the economic storm.
This confidence is not misplaced. But what is interesting is the lack of consensus on how best to survive and thrive.
ERIC SCHWARTZ
President
Equinix European Operation
“There is no difference now to how it was a year ago. In terms of colocation, in 2008-09 we reduced revenue expectations slightly and are now making more conservative plans. We are still planning to grow, of course, but it will be at a much slower pace,” says Eric Schwartz, president of Equinix European Operations.
Schwartz says there is still growth of the internet and even increased activity in the financial arena. “There is activity – it is just a matter of who is winning and who is losing.”All those trends portend on-going growth in the industry, in colocation especially.
“On issue of capital expenditure versus operational expenditure, we’ve been seeing that for years. As these facilities [data centers] become more complex, companies are turning increasingly to colocation suppliers.
“People who had originally planned to build their own centers are – because of economic dislocation and difficulty accessing capital – pursuing an outsourced or colocation model rather than building it themselves. They are restrained financially.
“The necessary expertise to design and operate data centers is going up and delivery is becoming harder to achieve,” explains Schwartz.
The company plans to stay focused on providing capacity and connectivity.
“We don’t compete at the managed services level. Our customers want performance, capacity and execution – they are looking to us to ensure that capacity is available.
“In terms of adding services, that’s not where we compete. That suits our model well – we have a fair amount of the technology expertise, equally focused. It is an on-going challenge. If you are operating a data center, then why not extend the services portfolio?” says Schwartz.
“Our customers don’t want to stretch our resources, and we have a signifi cant number of customers. We would have to make our service portfolio very broad. Too much scale and services, and you can drown.
“In terms of customer expectations, we haven’t seen signifi cant changes. Customers really focus on the quality of facilities. Our customers contract with us for a given amount of capacity of both space and power, and interconnection between carriers. That has stayed consistent. There are some customers who want power metered and some who don’t. It depends on the size of the customer,” says Schwartz.
Power prices are very volatile. “As power prices were going up, those who were metered felt it a lot quicker than those on non-metered. Any provider will pass along power pricing to customers, but we take advantage of long-term contracts and the like. “There are costs associated with metering. We’ve got measurement and reconciliation on how controllable the costs are. The trends are towards metered power.”
In the US, the average Equinix customer takes between 10 and 25 cabinets. The number is slightly higher in Europe.
“Historically, there has been a fair amount of demand pushing ahead of supply. In the current environment, people who have requirements know there is a reasonable amount of expansion coming online. In the discussions we have, we have to look 24-36 months out. Based on customers’ perspective – that there will be a tightening in the market – they’ve asked us for longer terms because they don’t want to be constrained,” he says.
Equinix sees price stability in the market. “Pricing levels are very stable. We’re not trying to exploit any situation. The trend I see is that strong companies are looking for opportunities to become stronger.”
JASON FRIEDLER
Head of Hosting Services
Telstra International
Telstra International’s focus is on global telecoms, providing MPLS and networking capability and expertise. It has also gone into managed hosting services.
The company owns its own UK network. Traditionally, in its owned facilities in London and Cambridge, it would offer pure floor space, colocation with bandwidth all the way up to hosting, and managed services.
“We’ve got assets and have the ability to squeeze them. Customers are being much smarter. They are not looking at reducing spend; rather, they are looking at virtualisation and consolidation,” says Jason Friedler, head of hosting services at Telstra International. Firms such as LastMinute.com and MultiMap are among Telstra’s clients, and the company cites them as the type of companies that are interested in exploiting the extra services available from their colocation supplier.
While everyone is cost-conscious and looking harder at return on investment, only those companies that have an internal IT capability are going down the pure colocation (without additional services) route. “We’ve made it known we can take away a lot of those management overheads,” says Friedel.
“We will sell you individual managed racks – a set amount of power – and have now started to offer our own managed services. The customer base is still the same, but we must be able to address more of their needs directly.
“In many respects, the service level agreements are industry standard – 99% uptime and 100% power. Connectivity is about offering as many resilient connections with no single point of failure. We have requests for bespoke solutions and we commit to that,” explains Friedler.
“Because we deal as a multinational, there may be a master services agreement that suits big multinational companies globally. So it means one single hosting, network and local loop contract,” he says.
But traditional customer demand still exists. “Take our data center in London. Our customers are more than aware what is happening in London and power prices are increasing for most of our customer base.
“Our efforts to go green went well and our customers accepted it. But we asked, ‘Would you consider moving to a lower cost base outside London?’ We were surprised at how many customers were wiling to pay a premium just to stay in London.
“In costs terms, some already buy power based on CPUs. The customers say, ‘I’d much rather be selling pence per CPU per hour. That’s a definite trend – without a doubt.
“Over the next 18 months, supply will barely keep up with demand. If the downturn hadn’t come, we would have seen oversupply. The demand is definitely there, but the downturn has changed the mix.
“We have seen our pricing as we wanted. In network pricing, there has been a slight price erosion over the last couple of years.
“For us , we need to be careful and wise about how we invest and execute our own plans,” concludes Friedler.
RHYS AMARILLI
Director
Managed Services Europe
Tata Communications
Rhys Amarilli, director of Managed Services, Europe, at Tata Communications, says the company invested in an 11-year lease with landlord Digital Realty Trust because of increased demand from its Europe, Middle East and Africa customer base.
“Managed hosting is seeing increased demand. Users are looking at cash they would rather not spend on day one and are also looking for fixed monthly charges. Customers either have a full data center, or a data center which can’t access any more power,” explains Amarilli.
“Things are becoming much more hard pressed with reduced IT budgets, but the demands are still there about how they carry on the delivery of business services.”
The latest Tata facility, which is west of London, will come on stream on 1 July. It will have 6MW of power running into it, with 3.6kW going to each per rack.
Landlord Digital Realty Trust has negotiated the power supply for the next six months of the tenancy, after which Tata will take charge of the utility contract.
The company has says it will leverage its relationship with parent company Tata (owner of steelmaker Corus), which uses vast amounts of power and is able to negotiate good rates, the benefits of which will be passed on to tenants.
“We come from a carrier background – we deal with an awful lot of connections into and out of India. We can meet more than just one network,” says Amarilli.
“Colocation is part of our solutions suite. We provide firewalls, MPLS access and application management. Part of the Tata approach is that we can own it end to end. We can give you a complete view of the service, everything is monitored.
Tata Communications is seeing the shift in requirements of colocation – savvy customers know what they want and know what they can get. It is not just about one element. For large end users, one guy on a cell phone can’t provide the level of support they need.
Amarilli cites one large client who wanted a Tier 3 facility. “The SLA arrived and its requirements were closer to that of a Tier 4 site. If there was five seconds outage they wanted punitive damages. They were saying, ‘We can’t afford any downtime at all’, so the answer was don’t host on one site. There had to be an anomalous data center,” explains Amarilli.
On green issues, there are a lot of green questions coming from the public sector. In Northern Europe they are asking some very detailed questions – for the platform at 50% what will the load be? “IBM and Intel are pumping out this kit that eats more and more power. We are already talking about running our data centers hotter,” says Amarilli.
