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The colocation market is headed for a cataclysmic consolidation, and investors could get seriously burnt, according to data center expert Zahl Limbuwala of predictive modelling software maker Romonet.

The boom in colocation has been driven by a vision of  data centers as high-value real estate with an unassailable specialist position, but all that will come to an end, thanks to the commoditization of the cloud, says Limbuwala's blog.  

Romonet makes predictive modelling tools that work out total cost of ownership (TCO) from the actual physical hardware in a data center, and it's taken a similarly bottom-up approach in a series of White Papers that look at how firms should work round developments in the data center.


Apocalypse now?

Now Romonet CEO Limbuwala has taken on the big picture, and his myth-busting blog is pretty apocalyptic.

Colo providers and their investors are fooling themselves, he says, and if that sounds out of step with the excitement around the space, it’s worth noting that the Wall Street Journal also has a blog that suggests data center real estate investment trust (REITs) such as Digital Realty and Dupont Fabros are falling out of favor.

Limbuwala says his warning is merely “the predictable outcome of a simple economic maturing of an industry that has enjoyed explosive growth over the last decade”, but it applies to hosting centers as well as those in the enterprise.
The hosting business model is based on capital investment in equipment, energy and staff, not in real estate, says Limbuwala. And this equipment has a much shorter lifespan than the 20 year reinvestment horizon normal in the property business.

“People will tell you that they are ‘sweating their asset’ which is fine up to the point that the customers’ contracts come up for renewal, and you now have an uncompetitive data center that’s also not fit for purpose compared to all the more recently designed empty new space,” says Limbuwala.

“If your data centers are approaching ten years old and have not had a major reinvestment you are in for a nasty surprise one way or another!” he adds.

The cloud is not your friend
Colo owners think the cloud works in their favour - and some inflated their firms' values by dressing up as a cloud business - but they are wrong, he says: “Don’t for a moment make the mistake of thinking that this means your data center is now magically worth twice what it was as a plain old ‘hotel for computers’ or even suitable for use as a cloud data center.”

“Cloud is the commoditization of IT services, nothing more,” he says. Cloud services are applications which have been virtualized, and unloosed from the physical hardware.

It’s inevitable that those applications will move to operators like Google and Amazon, with big scale, efficient hardware bought in bulk, and cheap property,

“[Cloud providers] are not saddled with ageing “Enterprise Tier III” data centers in expensive locations, they build the cheap cloud data centers out in the wheat belt,” says Limbuwala. “It matters which country a cloud data center is in, but not which state or city.

Colos are a short term fix
Colo providers that just look at the explosive growth in technology miss the point, he says, because hosting is a temporary phase, between old enteprise data centers, and the new cloud providers: “if you are a hosting only data center your share of that market growth is slowing down and from a real estate perspective (total sq. ft.) will eventually start to contract.”

“When corporate CFOs decided that owning the data center was a cost risk they could eliminate, but CIOs could still justify owning the servers, software and staff to manage them, we needed somewhere to put all that expensive tin,” he says. “The same financial decisions which started to kill the enterprise data center now apply to owning the servers.”

Colos can’t even rely on continuing to absorb enterprise data centers, as they are often no longer cheaper: “For many customers we have gone through the economics and the simple fact is that somewhere between 500kW and 1MW of capacity it becomes substantially cheaper (from a TCO perspective) to build your own data center than to rent colo. This change has come about due to the commoditization of everything from the mechanical and electrical plant through the design and construction.”

Your customers will leave you
For people who think their colo offering has a unique value - or at least has customers who will stay through inertia - he is scathing. Those customers could just disappear overnight.

“It’s entirely possible for a company to move all their virtualized applications over the network and then have an asset disposal company remove their old compute hardware - it was probably end of life anyway - and let then just let the hosting contract expire,” he warns.

“The decision about where to host your compute will soon be made by a resource broker or a market which has no interest in what your data center looks like, how nice your staff are or anything much else beyond cost, jurisdiction and service level.”

For colos, he has a bleak conclusion: “It is time to figure out if you should broaden your revenue source, get specialized (and don’t kid yourself on how much specialization opportunity there actually is out there) or sell while the going is still good.”