Among names like BitTorrent, SoundCloud and Pandora, the sponsor roster of May’s SF Music Tech Summit included a name few would associate with the music business: Digital Realty Trust. What was Digital, a real estate company with a data center focus, doing at a music-biz hangout in San Francisco? Well, most of the music that people listen to today is delivered out of a data center as opposed to a record distribution company’s warehouse.

Digital is already providing data center space for a number music-streaming companies, and the San Francisco-based data center wholesaler sees such services and other digital media firms as a major growth market. This has led Digital to ramp up its retail-colocation play over the past two years or so.

Joe Goldsmith, VP and GM of colocation at Digital, says serving this market requires some flexibility on the part of the data center provider, so Digital has had to make some adjustments to its services portfolio. “This is an incredibly dynamic sector of the market,” Goldsmith says. “They have a tremendous amount of uncertainty [about future capacity demand].”

A customer can lease ten racks and, one week later, require ten more. One music-streaming company, for example, recently signed a contract with a major record label to add the label’s music catalog to its database, which doubled its data center requirement, Goldsmith says, declining to say the customer’s name.

Greater capacity

The need to expand capacity quickly is paramount for customers such as this, so Digital has to have data center space ready – fit out to a level that Digital has not traditionally done. The most ‘fitted out’ offering in Digital’s traditional wholesale portfolio, which it considers turn-key, is far from what some media companies would consider turn-key.

Goldsmith recalled a recent data center tour he gave to a CIO of a media company. When he showed the CIO a turn-key pod, the CIO disagreed, saying it was a shell. For customers such as this, a turn-key data center has everything but their IT equipment – from raised floor to power strips.

So Digital has invested in both infrastructure for its retail-colocation offering and new people, creating a deployment team that can help customers provision equipment in data centers. It has also added capabilities such as branch-circuit and rack-level performance-monitoring.

A gentle balance

Selling retail colo space, Digital has to walk a thin line. Some of its biggest wholesale customers are retail colo providers such as Equinix and Telx. “They are large and long-standing customers of ours,” Goldsmith says. “Many of these players have started small and have grown very large.”

Rick Kurtzbein, research analyst at 451 Research, says Digital has to be careful when striking deals with customers that potentially could belong to its own clientelle. “I don’t think Digital would do anything like undercut pricing to win a deal,” Kurtzbein says. “That would upset a major tenant like Equinix or Telx.” He says a retail-colo deal is not worth undermining such important customer relationships.

Digital is not the only wholesale provider doing this balancing act. Most of its competitors in the wholesale data center market, including CyrusOne, CoreSite and QTS, will also sell a rack and, in some cases, less than a rack.

This is a good way to not only have a diverse service portfolio but also to maximize the value of assets. A couple of years ago Digital realized it had a lot of empty pockets of space in some of its buildings with high carrier density (particularly its carrier hotel at 2323 Bryan St in Dallas). It could only sell these as retail-colocation space. These were pockets of 200kW, 400kW or 600kW capacity, which would be hard to find wholesale customers for.

Some wholesale customers took notice and asked for colo services in other markets, so demand grew from its existing tenant base, Goldsmith says.

Whether a customer chooses to come to Digital for retail-colo services over an incumbent in the retail market will vary from location to location and building to building, Kurtzbein says. “I don’t see their retail being that significant in the Dallas market,” he says. In San Francisco, however, where colocation space is extremely scarce, demand is likely to be much higher, according to him.

The lines blur

Digital only offers colocation space in highly connected buildings, such as the aforementioned Dallas property. Having a large group of carriers in the building has always been crucial in the retail colocation business, but wholesale companies, including CyrusOne, CoreSite, DuPont Fabros and Digital, have been ramping up their connectivity play recently.

Kurtzbein says he sees increasingly blurring lines between wholesale and retail data center provider models. Retail providers are now selling larger amounts of space and wholesale providers are signing lower-capacity deals.

Don’t expect a complete blurring, however. As Kurtzbein points out, colocation revenue is still a very small portion of total revenue for a company such as Digital.

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