The European data center market was already beginning to accelerate when the world changed in early 2020. According to CBRE’s Europe Data Centres Q1 2020 report, the FLAP markets (Frankfurt, London, Amsterdam and Paris) accounted for approximately 200MW of capacity leased in 2019, and they are on target to do the same this year. Fast-forward to Q1 2020 when Covid-19 started to show its impact on the world. Closing businesses and schools sent vast swaths of the population home where many people began watching movies and shows online, collaborating with coworkers via video conferencing, and engaging in other data-intense activities at an enormous rate. Microsoft saw “a 775 percent increase in Teams' calling and meeting monthly users in a one-month period in Italy, where social distancing or shelter in place orders have been enforced”. Indeed, the amount of content being streamed was so substantial, it forced major streaming companies to reduce bit rates to conserve bandwidth.
The importance of the FLAP markets can’t be understated. However, gone are the days when countries like Italy, Spain, Poland, Switzerland and others were serviced only by the likes of Tier I FLAP markets. Mitul Patel, head of Europe, Middle East and Africa data center research at CBRE, explained recently, “As the hyperscale companies roll out their services more widely across Europe, the rate of hyperscale procurement of data center capacity in other European cities will increase rapidly. As a result, markets such as Madrid, Milan, Warsaw and Zurich will witness a substantial increase in colocation activity.”
The pandemic has added to the urgency for European cloud providers to expand beyond the FLAP markets and regionalize their data center strategies. This urgency extends to companies from the US and other regions growing within Europe. Rising demand for the aforementioned services is driving the need for data centers to be located closer to customers to reduce latency. Privacy laws that require data to stay within the geographical boundaries of a country are also contributing to the growing need for data centers in Tier II markets.
In some cases, this approach may even be an imperative. Switzerland, for example, has a history of very strict data sovereignty regulations that are designed, in part, to keep data within the country’s borders. Likewise, some European governments may want their data being housed in their own country.
In short: now, instead of building a massive data center in one of those major areas, it is beginning to make far more business sense for cloud providers to invest in highly scalable, localized operations. They can get closer to their customers, enabling them to provide better service and satisfy local data privacy regulations, while giving themselves room to grow commensurate with increased demand.
The growing European markets to watch closely
As the demand for capacity from the hyperscale community continues to expand, FLAP markets are facing some challenges related to available land and power. Therefore, data center developers are looking further afield for new, untapped locations for their facilities.
For example, Germany is building a strong and robust digital market. In 2019, according to research firm IDC, Germany was the fourth-highest spender on cloud computing technologies with $9.5 billion invested, behind the US, China and the UK Statista estimates data center investment to reach $13.3 billion in Germany for 2020. To meet this demand outside of Frankfurt, four of Germany’s largest cities – in particular Berlin, Munich, Hamburg and Dusseldorf – are attracting data center developments to serve their populations.
Northern Italy, specifically Milan, is quickly becoming a hot spot for cloud providers, too. Recently, Amazon Web Services (AWS) announced the immediate availability of the AWS Europe Region in the city, which marked the first region in Italy to be launched by a major cloud provider. A few weeks later, Microsoft announced a $1.5 billion investment plan to accelerate digital transformation in Italy, including its first cloud data center region, also in Milan.
In addition, Switzerland is one of the countries that had the largest number of new hyperscale additions in the last year, according to Synergy Research. The country has distinguished itself from its neighbors by its political and regulatory environment, along with its high bandwidth and central location in Europe. Zurich recently ranked in the top six in political stability according to the latest Data Center Global Market Comparison from Cushman & Wakefield, making it attractive to companies looking to expand their footprint there.
And although Western Europe accounts for 65% of total investment in EMEA, Central and Eastern European governments are accelerating the digital transformation of their countries. In addition to having obvious advantages for the data center industry - available land, competitively priced power and rich connectivity - Poland is taking the lead as the digital hub between Western and Eastern Europe. According to rankings by Deloitte Technology, 20 percent of the fastest-growing technology companies in Central Europe are in Poland. And, like some of the markets mentioned previously, Poland is drawing attention of the major players with Google and Microsoft recently announcing investment plans in Warsaw.
Speed to market has become even more important
Speed to market has become even more critical for hyperscale and cloud companies looking to grow in Europe. Data center providers undoubtedly want to be able to meet this demand in the current climate, and with competitors on their heels, they can’t afford to wait.
Thus, hyperscale and cloud companies have a choice to make: build their own data centers or partner with a data center provider who has a presence in the desired market. Although building a data center may be attractive for various reasons to some companies, there are many challenges that must be overcome when choosing this option.
In particular, the time it takes to build a data center in Europe can be longer than in the US In some markets, it can take up to 12 months to even obtain the necessary permits. Site selection can also be difficult and time consuming as land tends to be at a premium throughout much of Europe, coupled with the challenges Covid-19 has created for due diligence. Add to that the time it takes to physically construct the facility and deploy services, and companies could face a wait of several years before the operation is up-and-running. This common scenario will likely give many organizations pause before they opt to break ground themselves.
The case for partnering
Hence, if speed-to-market is a top consideration, self-building a data center may not be the most prudent decision. Organizations seeking a quick market entry may instead elect to lease space with a partner who has already done the necessary due diligence and behind the scenes work, such as site selection, validating fiber, securing the necessary permits and ensuring consistent, reliable sources of power are available.
In some European countries, power can be scarce, and negotiating with utilities to ensure that a site receives enough power can be an onerous task. Partnering with a data center provider who already has a site and secured power mitigates that challenge, as the provider assumes the responsibility for supplying end users with the appropriate amount of IT capacity. Furthermore, that data center operator may already have well established relationships with local utility companies which could give them leverage to broker favorable financial agreements resulting in significant cost savings for customers.
Another consideration to weigh is human capital. The workforce is not as plentiful in Zurich, for example, as it is in London or another larger FLAP market. Therefore, while the demand for skills will undoubtedly continue to increase as more companies make in-roads into these regions, finding the right staff today remains somewhat of a challenge and could delay time-to-market. Data center providers will already have these employees in place, giving customers the freedom to focus on their core businesses and invest their capital elsewhere.
Scaling across Europe
Regardless of whether hyperscalers or cloud providers decide to build their own data center or partner with a provider, they must consider the importance of scalability. Perhaps the sudden and sharply escalating demand for online services that COVID-19 ushered in will eventually abate somewhat, but the use of compute in general is only rising as it was pre-Covid-19. Companies must ensure that their data centers, whether leased or owned, are scalable so they can adequately meet what can oftentimes be unpredictable demand. A scalable data center campus is essential to accommodate ongoing growth. And if companies opt to lease space, choosing a financially sound partner, with access to similarly scalable capital, is critical to ensure data center developments are fully funded for future expansion.
This growth is real, and it is happening quickly. Though the FLAP markets remain as vital as ever, the European data center map is expanding rapidly, providing companies with a great opportunity to bring their services closer to their customers. There’s enormous potential in these dynamic markets. Data center operators must move fast to take advantage and gain a competitive edge.
