Part Three of The Issue of Scale - So What?

The question 'So What' is probably my favorite question to ask when a great idea comes to mind, or I hear a pitch about something. If I haven't answered the 'so what' question in advance, then I have failed in specifying and conveying what matters. I have also failed my colleagues if I merely whine about an issue without coming up with at least one solution.

On the Issue of Scale, so what? Follow up question - what can be done?

The so what question comes down to supply and demand. The supply for large footprints is dwindling and will only get tighter. That drives price up in mature markets. Sure you can get a deal in Oklahoma City, but I would put money on paying more to be in Northern Virginia, even outside the Ashburn/Reston data center nucleus.

I had posted a response to a post by Lydia Leong at Gartner

She makes the argument:

If I’m going to believe in gigantic growth rates in colocation, I have to believe that one or more of the following things is true:

- IT stuff is growing very quickly, driving space and/or power needs
- Substantially more companies are choosing colo over building or leasing
- Prices are escalating rapidly
- Renewals will be at substantially higher prices than the original contracts

I don’t think, in the general case, that these things are true. (There are places where they can be true, such as with dot-com growth, specific markets where space is tight, and so on.) They’re sufficiently true to drive a colo growth rate that is substantially higher than the general “stuff that goes into data centers” growth rate, but not enough to drive the stratospheric growth rates that other analysts have been talking about.

My counterpoints were that Virtualization is driving power densities up, not down. Colocation pricing is based on power density, whether expressed in square feet or per Kw rent. Density goes up, so does cost whether the cost is new CRAH/CRAC units, a new building, or a 50MW transformer.

Second - more companies look to outsource anything that is not a core competency including data centers than look to build up in house capabilities and staff. The construction of data centers gets more buzz than leasing does, but leasing still outpaces building every quarter. The companies who build are single tenant facilities with cash to do it. However building one and running one are two different businesses.

Prices are increasing. 'Ready to go' supply (a.k.a finished space) is taken in most major metro markets. That said, there will always be a company that will buy some business, get a loss leader anchor tenant and those decisions have many variables like loan structures, financing vehicles, etc. that drive what a company will charge on a specific deal.

Renewals are being done at higher price points. The cost of capital to grow is very high, data centers are incredibly capital intensive up front and companies that are doing renewals are seeing bumps in rates going forward. The counter seems to be to shorten term as if to send a message to the company that 'if you're going to jack my rate then I am only doing a 12 month renewal'. You know what, the vendor likes that more because in 12 months there will be less space and higher rates.

So how does one deal with this?

Put ROFO's in your license agreements. It gives you the ability to preserve space if a facility is filling fast. It may cost you more if the new customer is willing to pay more, but it beats having to run two sets of infrastructure in two separate facilities.

Investors - open up your checkbooks. If you got burned in the last build up - here's your shot at redemption. The window will start to close in 18 months in that you want a project funded and rolling and cash flow positive in 18-24 months. If you're looking for a fast return - stay out of this arena.

Operators - there are many deals out there to roll up assets that are underperforming and make a reasonable play and expand with rent in place.

End users - take space now if its available - especially in hot markets. If you think that virtualization will save you, it wont - your power draws will go up, we have never created less data than the previous day/week/month/year. If you think I am wrong look at it this way - every increased megapixel of camera that comes out increases file size, things go viral, and what was one picture can become a dozen copies of a a 2 megabyte photo, in other words 2megs * 10 copies is 20 Mb, not 2.

Lastly, there is a reason that there are hot markets and data center clustering - it's network density. More carriers in a building means better performance, fewer hops and lower latency. Go to buildings with high carrier density.