Recent predictions for the cloud and data centre industry from IDC show that the market is heating up, and with it the level of competition. Yet many data centre operators still seem to be in denial of just how much pressure this new competitive environment is placing them under. Their way of denying this pressure so far has been to say, ‘look at our revenue figures!’ or, ‘look at our percentage growth!’ The problem is that focusing on these superficial statistics is horribly reminiscent of the strategies that many companies followed during the last data centre boom. Then as now, their message was, ‘just focus on what we’re pulling down, not what our margin is’.

SolarWinds has purchased cloud-based log management company Papertrail for $41 million
SolarWinds has purchased cloud-based log management company Papertrail for $41 million – Thinkstock / Romolo Tavani

Billing madness

An example I remember from the previous boom was an IT hall that was being rented out to a blue-chip client. The space was completely filled, but the charge to the customer didn’t even cover the electricity bill the hosted equipment was drawing! Granted, people have gotten smarter about billing in various ways since; for example, by installing metering in racks or charging IT services back to other business users. However, most providers still don’t understand their true costs or take into account the capital expended when assessing their success against their competitors.

Pricing for these organisations has become an increasingly vague process. At best it may consist of calculations on, essentially, the back of an envelope; ‘finger in the air’ assumptions; or vague comparisons to competitors’ charges, whose circumstances and costs might be very different. On the opposite side of the scale, over-pessimistic and obsolete approaches to power density and cooling mean that many facilities never reach their built capacity and so expensive space is wasted.

From experience I also know that empty data centre space instils a combination of panic and greed in the sales force. When the motto becomes, ‘sell the space, no matter what you get’, one can be confident that this is not a sure recipe for making the best possible margins.

The survivors of the last market correction were able to acquire some valuable (and some truly awful) assets for very little money when the bubble burst. However, with the industry looking well on the way to another painful lesson, the landscape after this correction is likely to be even harsher. As the cloud makes it more and more difficult to compete with the increasingly dominant players, it’s unlikely other investors will want to pick up assets even at fire-sale prices, meaning there is little hope of a soft landing. Operators need to learn quickly: revenue is part of the story, but understanding actual profitability is key to surviving and even prospering.