08 September 2022
Consolidation is inevitable in most sectors, because companies continue looking to make savings. However, that doesn’t necessarily mean it’s always a good move. Robert Shepherd asks those in the know that they think
Why is there so much consolidation in the data centre space?
John Hall, managing director – colocation, Proximity Data Centres: The data centre market is undergoing significant changes probably more than in any time in its history. Enterprises that have traditionally owned their own data centres are moving some, but not all, of their IT workloads into Cloud based environments. As a result, they are considering how to re-utilise or sell the considerable assets they have invested heavily into over a number of years. It is important to note that whilst it is true that some applications are easily transferable into the cloud not all, particularly legacy services fit here. Sometimes the pricing models of the cloud providers can make running certain types of services very expensive. Another point is the skills required to migrate workloads are still scarce and this causes delays and costs. A metaphor could be the pendulum initially swung from enterprise owned data centres to cloud-based services but is now returning to middle ground as new services and applications sit next to legacy.
David Sandars, business development manager, Vantage Data Centers UK: The enterprise needs to focus on its core business. Operating a data centre is not the core business and therefore it should be outsourced to the experts. Legacy data centres no longer fit for purpose, too expensive to maintain/upgrade. More flexibility to add network services and power capacity quickly in colocation for example to enable staff to work from home during lockdown.
Colocation customers can save money on maintenance, support contracts and insurance premiums when data centres are moved to the specialists. Virtualisation can mean much less space and power required at a data centre therefore saving more money. Enterprises are reviewing use of office buildings following Covid and closing buildings which means moving the data centre out.
Matt Edgley, director, Teledata: Opening a new site takes a huge amount of investment. Not just to build the data centre, but also to build a team and bring in the network providers. Network providers rarely take a speculative view on bringing their networks into a new site and they like an existing customer base to work with. So not only does it take a lot of investment, but it also takes a lot of time to build and fill a standalone site - time which adds to the potentially long period of time where the new facility makes a loss. Therefore, buying a quality facility with clients, networks and available capacity is highly attractive – particularly if entering a new regional market.
Richard Clifford, head of solutions at Keysource: Data centres have been one of the few industries to have seen growth during the Covid pandemic, in part as the trends shifted to remote working but also against a backdrop of global digitalisation. This makes the market very attractive for investors and we continue to see small, medium and large mergers and acquisitions, as well as extensive green field deployments. For operators this can be a mixture of access to new markets, growing portfolio, fulfilling a client need or simply taking market share. Pre-Covid the consolidation of data centre operators such as CenturyLink/Lumen and Level 3, or Digital Realty and Interxion, was driven by a need to diversify their approach to the market, with the aim to increase market share and reach. However, oversaturation of Tier 1 cities is now driving a focus on Tier 2 cities and more of an ‘Edge’ regional approach. As a result, we are seeing the acquisition of more ‘independent regional operators with the likes of Proximity and Pulsant building a network of ‘Edge’ facilities to respond to current and future demand.
Eric Herzog, CMO at Infinidat: Consolidation is a natural process when an industry matures and this is happening currently in the data centre service provider space in an attempt to achieve better economies of scale in a global environment. It has implications for enterprise buyers seeking long term partnerships with data centre service providers and companies seeking data centre services need to consider their needs carefully. For instance, they need to look at all the different feature functions offered – availability, performance, integration capabilities and support for legacy applications – when making decision about which provider to select.
Simon Brady, data centre optimisation program manager for Vertiv: It’s the usual circle of life; big fish eat little fish and survival of the fittest. There’s nothing unusual or different to consolidation within any industry. If organisations want to grow, the options are to do so organically or by acquisition. Often in a crowded market, acquisition is the only option and for big organisations its more straight forward to leverage fixed cost bases. As the larger data centre operators grow, and growth is high right now, it’s often an easier and faster route to being operational to acquire an existing facility rather than build a new one from scratch. This is especially true in geographies where the operator needs to be present, for example if a customer requires it.
Is consolidation good or bad for data centres?
Simon Brady, data centre optimisation program manager for Vertiv: Consolidation is both good and bad for the data centre sector. It’s good because it can drive costs and prices down for customers as the larger players work to remain competitive, but also bad as decreased competition is never healthy for any industry. There will always be niche players but the hyperscalers are very effective at optimising their infrastructure, which is potentially also good for the environment. Hyperscale sites and operators tend to operate at near 100% capacity so are as efficient as
“Sometimes the pricing models of the cloud providers can make running certain types of services very expensive”
John Hall, managing director – colocation, Proximity Data Centres
they can be. And, nearly all them use renewable energy sourced from wind, water or solar power and have made bold commitments to achieve Net Zero. Fewer smaller operators have made the same commitment.”
Matt Edgley, director, Teledata: There are positives and negatives. The larger providers will generally invest in existing facilities to beef up infrastructure, but this will often have an impact on price. In the world we are living in today though, larger providers do bring greater security during unprecedented cost increases due to energy prices hikes and such like. But of course consolidation gives clients less choice due to limited competition. We’re seeing more consolidation between the larger providers as well – such as Equinix/Telecity, where Equinix were actually forced to divest seven facilities by the competition commission.
Isn’t reduced competition detrimental to enterprises and what should be a competitive arena?
David Sandars, business development manager, Vantage Data Centers UK: Reduced competition is bad for any industry but I don’t see that there is reduced competition.
I think there is more competition in the UK market giving much more choice around one of the key factors which is location. A few years ago the industry was focused in and around London, now there are large scale operators in Cardiff, the Midlands, the SW, NE, NW, eastern England and Scotland
Previously private data centres are opening as colocation facilities giving clients much more choice as to the ideal location for their IT estate and with improved network availability, reliability and latencies, location is less of a factor for enterprise businesses.
Simon Brady, data centre optimisation program manager for Vertiv: In general, reduced competition is good for enterprises. Larger data centre operators tend to have better, standardised operating and energy policies which is a benefit to customers.
Matt Edgley, director, Teledata: It depends on their strategy and approach – do they like to diversify their providers for resilience, or do they like to partner with a single provider with multiple sites? - in which case it could definitely be a plus point. One general problem within the industry is that the cost of opening a site really restricts new entrants and makes consolidation more attractive, which is why we’re always hearing about undersupply. The main concern is lack of facilities rather than lack of providers.
Richard Clifford, head of solutions at Keysource: This reduced competition can be good or bad, depending on the situation. On the one hand, it can lead to increased efficiency and economies of scale. But on the other hand, it can also lead to higher prices and less choice. Consolidation of the market can help to connect ‘demand’ with already established real estate that would otherwise be inaccessible due to the size of the operator, or lack of a wider more geographically resilient network of data centres. This has benefits such as speed to market, avoiding long and costly construction times. But also, in a time of climate emergency, leveraging existing data centres is an opportunity to reduce the embodied carbon held in manufacturing and construction of new facilities. There is a significant amount of stranded capacity amongst data centres globally with Enterprise and legacy facilities only operating a fraction of their design capacities, in some cases just 20% to 30%. This is leading to huge inefficiencies and with this stranded capacity going to waste, consolidation of the enterprise estate makes absolute sense.
Eric Herzog, CMO at Infinidat: It completely alters the competitive landscape and if it goes too far, over consolidation can cause problems, because too few providers mean the surviving entity could have greater control of pricing and supply. This is true for every industry. Many cloud service providers are using Infinidat technology for their storage-as-a-service (STaaS), infrastructure-as-a-service (IaaS), and platform-as-a-service (PaaS) offerings and we are highly regarded for our hyperscalar implementations. Several storage industry analysts have noted that Infinidat is setting new standards in the storage industry with the performance of the Infinibox SSA II - we are setting the bar very high for the entire cloud provider industry and enterprises benefit from the increased performance, availability, and cyber resilience of the Infinidat enterprise storage solutions.
“Enterprises are reviewing use of office buildings following Covid and closing buildings which means moving the data centre out”
David Sandars, business development manager, Vantage Data Centers UK
John Hall, managing director – colocation, Proximity Data Centres: When Proximity buys a data centre typically the existing owner of the facility becomes a tenant. This gives them a far more flexible model as their requirements change but with the advantage that there is still continuity for their IT services. There is not reduced competition as the enterprise has the option to use cloud based services as well as the use of data centres.
Is there a fear that one or two dominant players will create a mono/duopoly?
Simon Brady, data centre optimisation program manager for Vertiv: I wouldn’t say that there is a fear that one or two dominant players will mono / duopolies the sector. However, it is clear that the “big 3”, Google, Amazon and Microsoft, will dominate the industry. There will always be niche players and as big as they are, they rely heavily on the tier 1 operators for much of their facilities and infrastructure. On the other hand, we should also consider that many countries are implementing in country data protection standards. This means there will always be a need for localisation which does suite smaller operators.
David Sandars, business development manager, Vantage Data Centers UK: I don’t see that one or two players will be able to dominate the sector it is too expensive and complex to buy up all the data centre companies. As we’ve seen recently, government regulation will prevent one or two players dominating the sector and will ensure competition. I believe there will always be competition and choice.
John Hall, managing director – colocation, Proximity Data Centres: The sector is moving to a mixed model of cloud and edge data centres. There are probably 8 to 10 traditional cloud operators who use hyperscale data centres so plenty of choice. Many enterprises have adopted a multi-cloud approach to avoid over reliance on 1 provider.
At the edge the choice is probably more difficult as the enterprise needs to partner with an organisation who has a proven track record in supporting them in the move to a hybrid model. The new application providers which require low latency delivered from local data centres need a partner who is flexible and experienced in helping them take their services to market.
Richard Clifford, head of solutions at Keysource: Not currently. Consolidation has if anything driven more competition, with rapid growth and acquisition creating new competing entities that were not there previously. This trend will continue, but the threat of a monopoly is not there for the next three to five years.
Matt Edgley, director, Teledata: Yes, this is a realistic issue – again due to the cost of opening new facilities and therefore the emergence of new players. The more dominant providers are more likely to be in a position to open new facilities, so their market share will grow by default.
