Colo High On Cloud, Connectivity Demand

Colocation and data center providers have had a great run over the past couple of years. The combination of exponential demand growth and limited available capacity has driven up prices for space, power and managed services. I recently moderated a panel of leading colocation and data center providers at the 32nd annual Pacific Telecommunications Council event in Hawaii. The panel included representatives from Equinix, Savvis, Switch & Data and Telx, who all spoke at length about the market, their place in it and what the future holds.

Opportunity for All Business Models. All of the providers were, I suppose predictably, optimistic about the future of their industry, regardless of the niche they filled. Space- and power-focused players, like Equinix, Telx and Switch & Data, are looking forward to continued growth in demand from power-hungry hosting and Web service providers that want data center space that is well managed, stable and reliable. Savvis, which has more focus on managed services, sees the growth in cloud computing and hosted applications as promising for its business. Further, the firm believes that customers will see real value its ability to let customers test drive an application on its hosted infrastructure without the need for customers to make long-term investments in hardware and space in a data center.

Interconnection as a Growing Revenue Stream. Providers also see future opportunities in their growing roles as interconnection points for carriers. Switch & Data recently announced that the Unity Cable between the United States and Japan will be terminating in its Palo Alto data center, and it looks forward to the connectivity opportunity it will provide. Equinix’s Carrier Ethernet Exchange has been a hot topic of late, and the provider sees its ability to offer a truly carrier neutral platform as key to future growth. In addition, Equinix has plans to help mobile carriers streamline backhaul and tower connectivity. As the two companies, Switch & Data and Equinix, have a pending merger, their combined assets, interconnection platforms and connectivity will create a formidable contender, both domestically and abroad, for helping carriers more effectively deliver data.

Challenges Facing Providers in an Up Market. When speaking of challenges facing the colo/data center market, all of the providers' representatives were quick to sidestep competitive threats to talk about their need for new facilities, space and capacity. While there are many small providers in the market that are ripe for acquisition, most of them with space in desirable markets are at or near capacity. When considering expansion, it is vital that providers make prudent decision with regard to market, site, size and design in order to maximize ROI.

The Bottom Line. Beyond the opinions of the providers, all outside indicators point to continued growth in the colo and data center space. Continued growth in data demand, coupled with a growing drive for online and hosted applications and cloud computing, is securing demand for these providers' services for the foreseeable future. While the providers divide along services lines, with some focusing on carrier interconnection, some making bulk space and power their priority, and some making an effort to better service enterprise clients with flexible managed solutions, they all have assets that are greatly valued by customers. While some further consolidation is likely, there also will be considerable investment in the space going forward. Judging by the numbers, there is little chance that the current build rate will outpace demand any time soon.

Fedor Smith is president of ATLANTIC-ACM, a provider of strategy research, consulting and benchmarking services to telecommunications and information industry companies. An expert in niche- and channel-based marketing and operations management, Smith specializes in customer satisfaction and benchmarking projects for ATLANTIC-ACM, where he oversees proprietary projects as well as the firm's Carrier Report Card series, which serves as the telecommunications industry's principle source of benchmarking tools. In addition, he has authored several studies on telecommunications industry growth and opportunities. Prior to joining ATLANTIC-ACM, he worked at Alloy Media and Marketing in New York developing youth-oriented marketing programs around the evolving technology consumption and adoption habits of high-school and college-age consumers. He holds a degree in history and economics from Hamilton College.