In recent years, the world’s largest data center operators have invested heavily in their European networks, aiming to meet tougher data residency regulations and to host information closer to the edge of the network to reduce latency and serve customers better.

In January 2016, Equinix bought TelecityGroup for $3.6 billion, gaining more than 40 data centers on the continent. Meanwhile, Apple, Microsoft and Google are investing in Irish, Dutch and Scandinavian facilities. Big US providers and enterprises are fortifying their presence closer to their end users across the Atlantic

But in June, a referendum in the UK signaled a potential change in the make-up of Europe, with 52 percent of British voters opting to leave the European Union. Since then, small and mid-size data center operators, and the European nations which host them, have been considering how best to respond to the vote, popularly known as ‘Brexit’.

Scandinavian benefits?

Scandinavian countries, for instance, have a cold temperate climate that reduces cooling costs, are politically stable, and have cheap renewable electricity.

In northern Sweden, the non-profit Node Pole group guides data center investors to any of four municipalities of Boden, Luleå, Pitea and Alvsbyn, near the Arctic Circle. The Node Pole Alliance brings together technology and construction partners that have so far built a sizable cluster of ten data centers, which includes Facebook’s 290,000 sq ft facility in Luleå.

Hydro66 is a UK-based company that was convinced to split its operations between a London sales office and Swedish data center. Its Boden site hosts a 100 percent hydroelectric-powered colocation facility, located next to the Lulealven River, which it says helps provide Europe’s cheapest electricity.

Andy Long, Hydro66’s chief executive, says the company has been able to offer something compelling, as part of a tight-knit tech cluster. He told DatacenterDynamics: “We found an incredibly supportive local government, business and academic community. By working in partnership we’ve been able to make a data center which makes Facebook or Google operating economics available for everyone.”

The company’s website displays readings showing how much cooler it is in Boden compared to London, and shows the comparative electricity costs in the UK – an explicit bid for custom that might otherwise head to London.

Scandinavian countries have a cold temperate climate, are politically stable, and have cheap renewable electricity.

Long says Hydro66 is not concerned at the effect of Brexit on operations. Instead, he predicts strong business from the UK, Germany, the Nordics, and expects US companies will be more likely to consider continental Europe, instead of the UK, to serve EU customers.

According to a 2015 report published by consultancy firm BroadGroup, the power available to data center operators in the Nordic region is expected to triple by 2017, as a predicted surge in demand hits. 

Paris swing

The Node Pole is not alone however: “There are a couple of other [cluster] areas that have had success too, but I think they are in locations where the percentage of renewable generation is quite low and there are capacity constraints,” Long said.

Amsterdam and Frankfurt are already well established, but the next major tech hub to emerge could be Paris.

France has abundant cheap nuclear power and a skilled workforce so, if Paris can overcome the language barrier, Brexit might just provide the impetus to attract new clients looking for a European presence.

Amsterdam and Frankfurt are already well established, but the next major tech hub to emerge could be Paris

Equinix already has seven IBX data centers in the French capital, and in August it completed the $212 million purchase of a St. Denis facility from Digital Realty, located on a site where it already owned two IBXs. France is a “key market” for Equinix, according to the company’s chief executive, Stephen Smith.

In July, France-based Data4 heralded the return of growth to the country’s data center market, announcing plans for three new facilities at the same time as it completed the expansion of its 110-hectare campus near the capital, having sold 6MW in three months.

Adam Levine, Data4’s chief commercial officer, put this into context for DCD. Paris has around 127MW of data center power capacity in total, which is only about one third of London’s aggregate power. But the market has huge potential, he said.

“The [addition of] 6MW predates the UK’s vote to leave the European Union, but the possibility of Brexit could be a boost for the site,” he said.

Paris lacks the popularity of hosting cities like Dublin, London, Frankfurt and Amsterdam, admits Levine, but he says the Paris cloud market has had to overcome teething troubles: “Now we are over a lull which was caused by enterprises reluctant to adopt the cloud.”

But this is starting to change, as prospective customers wake up to benefits which include relatively cheap power for a Tier 1 city, a central European location and tax breaks from the French government.

Amazon is understood to be planning to build two new data centers in Europe in the next year. One could be in Italy, after Amazon founder and CEO Jeff Bezos met Italian PM Matteo Renzi in July to discuss opportunities within the country.

Moves such as these, which increasingly politicize the construction of data centers, may become more common as data protection regulation evolves and nations try to lure providers to their territories for financial gains.

Luxembourg’s government has long been making concessions to attract data center developers. In 2006 it set up a private company to kick-start the country’s digital economy with the aid of public funded loans.

Dangers of Balkanization

But government involvement can sometimes produce more problems than solutions. Outside the EU, in 2015 Russia introduced legislation which demanded that information about its citizens be stored within its borders. Large US tech companies including Google and Facebook initially hesitated to comply, not relishing the cost and inconvenience of moving their data out into colocation facilities.

Eric Schmidt, executive chairman and former chief executive of Alphabet’s Google, warned in 2013 of the prospect of the Internet’s ‘Balkanization’, as a consequence of the over-involvement of individual national governments in handling data created within their borders.

The development of a compartmentalized Internet, with local rules for protecting data of citizens, would create “a federation of different data centers, each fiefdom with its own different rules,” said Steve Clemons, a senior fellow at the New America Foundation thinktank, in a Financial Times article.

The development of a compartmentalized Internet would undermine the economies of scale relied on by cloud computing 

This would undermine the economies of scale relied on by cloud computing operators, the article observed, and also potentially have a cooling effect on US investment in the European data center market.

The EU’s General Data Protection Regulation (GDPR), which will be implemented in 2018, attempts to unify the approach of member states to handling service users’ information, and may ultimately help create a more positive environment for data center operators.

It has also adopted the Privacy Shield agreement to impose stronger obligations on US companies exchanging data with EU states. The controversial agreement, devised to replace the Safe Harbor agreement that was struck down as invalid by the European Court of Justice, leaves many observers unconvinced and may yet be the subject of further appeals and subsequent revisions. However, it too could draw investors away from the UK as companies move to meet requirements of hosting within the EU.

Amidst the uncertainty, some industry figures have speculated that the UK’s data center market may well emerge in a healthier state than before the Brexit vote.

Could the UK benefit?

It is possible the UK government might seek to devise its own, more pro-business regulations to supercede the EU-brokered agreements once it completes its exit, though if it wants to ensure an easy exchange of data, adopting the ideas embodied in GDPR, in line with the rest of the EU could be a more sensible approach.

Trade association TechUK has said opportunity exists in Brexit, and has published a plan to ensure the country remains a desirable hosting location.

Cynthia O’Donoghue, a lawyer and partner at Reed Smith, has said the UK’s location between the US and EU could provide a chance for it become a ‘data haven’. Automatically generated data, or big data, can be exchanged relatively easily between the UK and EU, according to Convention 108 of the Council of Europe, and thereafter between the UK and US, she told Computer Weekly. Brexit does not affect the UK’s membership of the Council.

Trade association TechUK has said opportunity exists in Brexit, and has published a plan, but major US companies wanting to host within the EU could choose to locate data centers on the continent

But major US companies wanting to host within the EU as a result of GDPR could choose to locate data centers on the continent, instead of picking London.

Hosting provider Rackspace anticipates about $70 million of “negative impact” as a result of Brexit, its chief executive, Taylor Rhodes, said in August.

Its UK customers are spending less - something Rhodes attributes to the weakening of the British pound.

On a smaller scale, UK hosting provider Memset revised its plans to expand in the country in the light of Brexit, and is instead investigating growth in Europe and the US.

Boost for Ireland 

Ireland may be the destination that is best placed to profit from any decline in UK investment. Though it remains a relatively small market in comparison to London, it is close to Western Europe, with good connectivity infrastructure, has a low rate of corporate tax and a pro-business Irish Data Protection Act.

Even considering Ireland’s popularity as a hosting destination over the past few years, there has been a recent acceleration in development. In May, Microsoft secured planning permission to build four new data centers outside Dublin at a cost of €900m ($1bn), while in August Apple’s €850m ($947m) Galway facility was finally granted approval after months of legal wrangling.

There is even interest in Ireland from China, with e-commerce giant Alibaba scouting out potential data center locations near the capital, Dublin, in July. State utility provider Eirgrid said the country’s electricity capacity could support up to $7.7bn of investment beyond 2019.

The UK’s Brexit negotiations have yet to begin and much remains to be decided, including the country’s post-Brexit digital strategy. But the financial effects of the vote are already being felt.

The likes of Sweden, Ireland, and possibly France are planning to expand, and could be ready to take advantage of any changes to Europe’s structure.

This article first appeared in the September issue of DatacenterDynamics magazine