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One of the traps that data centre investors can fall into is believing that “data centres are where ‘The Cloud’ lives.” While it is true that cloud is delivered from data centres, this doesn’t mean that a data centre’s value will magically double from when it was a simple ‘hotel for computers’. Similarly, alarm bells should also ring if anyone suggests that a smaller scale facility is even suitable for use as a cloud data centre, at least at what you can afford to charge for it.

Microsoft will soon offer Azure Stack
Microsoft will soon offer Azure Stack – Thinkstock / nicholashan

Economies of scale

To understand the difference between smaller scale data centres and purpose-built cloud facilities, imagine a single diesel generator trying to compete with a power station. One has such massive economies of scale that the difference between the two in price per kWh, means no business would ever buy its electricity from diesel generators. However, many data centre operators have still managed to get vastly inflated valuations by dressing themselves up as ‘Cloud’ businesses; even when they are very much the equivalent of a diesel generator. Worse still, other businesses have then paid well the over the odds to acquire these operators, mistakenly thinking that they are buying themselves a piece of the Cloud.

 For the avoidance of any doubt, Cloud is simply the commoditisation of IT services, nothing more. Commoditisation means the only thing that makes your business a success is price: not complex biometric security, multiple redundancy or fancy marble foyers.

 Again, if we look at power stations, the average consumer really doesn’t care if the electricity keeping their TV running comes from gas, oil, coal, or solar power. They just want the price to be as low as it possibly can be. There is a market for the specialised data centre, in the same way there is a market for a 100 percent guaranteed renewable energy tariff, but for the vast majority of customers it all boils down to cost.

 If this sounds shocking you should remember that commoditisation is nothing new. Take a look at how the airline or shopping mall industries have suffered as a result, and you will get a feeling for the future margins and problems in store for data centres.