The colocation market is riding on the crest of a wave, fuelled by the growing demand for fast, ready access to datacentre capacity from the hyperscale cloud and internet giants.
In the rush to meet growing user appetites for locally hosted, high-performing and low-latency cloud services, the likes of Amazon, Google, IBM and Microsoft, are opting out of building their own datacentres in favour of using colocation facilities instead.
It is a trend that has been gaining momentum over successive quarters, shows the European colocation market tracking data shared by real estate consultancy CBRE. with its most recent report recording another record half-year period for datacentre capacity take-up within the major colocation hubs of Frankfurt, London, Amsterdam and Paris (FLAP).
“To-date the cloud providers have zoned in on particular markets in Europe. They have been very active in the core FLAP markets of Frankfurt, London, Amsterdam and Paris, and more recently in hubs such as Geneva, Zurich and Milan, and are now setting their sights on Madrid,” Mitul Patel, head of Europe Middle East and Africa Datacentre Research at CBRE, tells Computer Weekly.
“They are targeting key European cities that have significant business activity and/or those with a high population of connected people – these are the cities where cloud businesses are most successful.”
The colocation community has moved swiftly to respond to this trend, and ensure there is enough space to go around, with CBRE’s full-year report for 2017 revealing that more spare capacity came online last year than in any other previous 12-month period.
But just because a colocation provider has capacity to spare does not automatically guarantee a hyperscaler will consider it a good fit for their requirements.
Location, location, location
Sometimes it simply comes down to location. “Within these [geographical] markets the hyperscale companies have their own preferences for how they shape their colocation footprint and ‘availability zones’,” says Patel. “They may choose a [provider that offers] a linear distance between two sites or a triangular formation, for example.”
Shared history plays its part too, with hyperscalers often favouring one colocation provider over another because they have done business with them before in another city or country. “Hyperscalers, like other companies, value relationships and there is an element of de-risking the process by working with companies in new territories that have performed well for them in other markets,” says Patel.
What this serves to highlight is just how lucrative a first-time engagement with a hyperscale cloud firm can be for a colocation provider, as the potential for follow-on investment is sizeable, he says.
For both parties, a second or third-time engagement often takes less time to sign-off too, adds Stuart Levinsky, vice-president of sales, cloud and global accounts at global colocation provider CyrusOne.
“Getting your first engagement with one of these hyperscale companies typically takes three times as long as subsequent engagements because of things like contracts. These organisations are looking for proven track records, and proof you can deliver when you say you’re going to deliver,” he tells Computer Weekly.
His company operates 48 datacentres across the United States, Europe and the Far East, and – according to Levinsky – its services are currently being used by nine of the 10 largest hyperscale companies in the world.
“Securing that first win and first engagement for CyrusOne with these hyperscale companies gives us a chance to proof ourselves. And once that is done, and once you have got that trust, it opens the door for all subsequent future business,” he says.
First mover advantage
Securing an anchor tenant for a new facility has always been a top priority for both retail and wholesale colocation operators, says Steve Wallage, managing director of datacentre-focused analyst house Broadgroup Consulting.
But, given how lucrative landing a hyperscale tenant can be, competition for such deals is exceedingly high.
“We’ve had the likes of Amazon, Google and Microsoft investing in the UK, and if you’re a colocation provider who gets one of those deals – whoosh – you’re away, because they tend to land and expand, and that all generates its own momentum,” he says.
Especially because securing a hyperscale cloud tenant can often lead to winning the custom of their ecosystem partners too, says Wallage.
And it is not always the case that hyperscale firms will simply go for the best-known or most high-profile colocation provider in a given market. “They have shown they would be willing to go to newer players who don’t have a huge operational record,” he says.
Such an engagement would be a huge boon for a smaller player, but there are drawbacks, particularly when it comes to securing on-going investor support.
“It’s a bit of a catch-22. The hyperscalers are willing to go to an unproven player, but they [the colocation provider] don’t want to be seen as if their whole business model is dependent on them,” says Wallage.
Supply and demand becomes askew
Despite the high (and growing) demand for colocation capacity across the major European markets, one might assume datacentre operators would have the luxury to charge what they like, but the zero sum nature of these engagements means the opposite is true.
While the potential size and scale of their colocation engagements is huge, there are relatively few hyperscale prospects out there, says Wallage, compared to the number of colocation providers vying for these deals.
“There are only four or five [big cloud] guys, effectively, offering these deals,” he says, with Amazon, Microsoft and Google chief among them.
“People sometimes talk about getting Salesforce in or Alibaba in, but really it’s those top four or five.”
The balance of power between the colocation operators and the hyperscale cloud firms is such that the amount of capacity being acquired by the hyperscalers gives them an advantageous negotiating position, when it comes to agreeing contract terms, says CBRE’s Patel.
“The hyperscalers are responsible for so much take-up [in the colocation hubs], winning these requirements can be the difference between feast or famine. The hyperscalers are not short of providers willing to meet their requirements in any major market,” he says.
And they use this to their advantage, by demanding lower prices and break clauses in their contracts that leave the door open for them to take their business elsewhere at much shorter notice than the colocation industry is accustomed to.
In Levinsky’s experience, it is also not uncommon for hyperscalers to request “flex up and flex down” clauses in their contracts too, to give them a level of financial protection when it comes to rolling out new services within certain geographies, he says.
“If the hyperscalers want to launch a cloud service in a particular region, they won’t have revenue coming from it from day one, so they might ask [for some leeway] in terms of how quickly they have to move in or if we can scale our billing based on their rack counts.”
“And the flipside is, if that cloud service doesn’t take off, they will be looking for ways to flex down and reduce their commitments further down the road,” says Levinsky.
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The ability to respond to such requests is something smaller providers, with fewer facilities or a smaller geographical spread, might struggle with.
“There are certainly very sophisticated negotiators at the hyperscale companies, and the demands are becoming greater on organisations like us to offer greater flexibility and creativity in our contract terms,” he says.
“There are advantages to being a large-scale provider in our business, [because] I can aggregate that risk across a lot of geographies and datasets.
“The [request] we’re seeing more of is around portability clauses, whereby they will commit to using a facility in the Frankfurt market, but would like the flexibility to move a certain percentage of that commitment to another European location without penalty should they need to,” he continues.
The benefits that come from securing the business of a hyperscale cloud firms means colocation operators are usually happy to accommodate such demands, provided they are able to.
“The colocation players are keen to get the cloud business so they will bid aggressively and there is a view, because they are such a magnet for others to follow suit that it is worth discounting for them. On the whole, they will never pay more than £100 per KW unless there is a very compelling reason to do so,” says Wallage.
“As well as being very aggressive on price, there is also high demand from the cloud guys for flexibility. Whereas a lot of large deals in the past would have been for 10 or more years, a lot of the cloud guys are looking for break clauses from three-to-five years.”
Shortening break clauses
The demand for ever-shortening break clauses has emerged as a matter of concern for some colocation providers, who fear – should the demand for cloud services start to plateau at any point – the hyperscalers may start to ramp up their efforts to build their own facilities again.
It is a discussion point touched upon repeatedly during various sessions at Broadgroup’s annual Datacloud Europe conference in June 2018, but Wallage says it is too early to say whether this is an objective the majority of hyperscalers will be working towards.
“Sometimes they put in [short break clauses] because they can. To be fair, a lot of it is to do with their negotiating power. If you have everyone queuing up to offer you a deal, clearly you’re going to push it as aggressively as you can,” he says.
“The view of a lot of the colocation guys is they are willing to accept it, through gritted teeth, because they expect the guys to expand and take on more capacity [as time goes on] – not contract, but it is still too early to say what is going to happen.”
From Levinsky’s point of view, it all really comes down to how colocation providers think enterprise appetites for their services are likely to change over the coming years.
“We’ve got one school of thought that says enterprises will continue to move load into the cloud eventually to the point where they cease to be colocation customers, and they cease to run their own IT organisations and primarily all of the world’s IT requirement will be fulfilled by a relatively small handful of these hyperscale cloud companies,” he says.
“The competing view point suggests we’re not getting there nearly as fast as people think we’re going to, and – while enterprises might put 40-60% of their loads in the cloud, they’re still going to continue to maintain large IT kits and require colocation for some time to come.”
Meeting enterprise demand
If the former vision Levinsky lays out does become a reality, the hyperscale cloud giants are going to need a ready supply of datacentre capacity to meet enterprise demand for their services, and the colocation market should remain in rude health for a while to come on the back of that.
“If we do end up with 50 companies globally supplying all the world’s IT, then I do believe you are going to see consolidation [within the colocation space], and those companies that have built those relationships with the hyperscalers and are trusted technology advisors to them, will grow and become consumers of the smaller colocation companies,” he says.
“I don’t personally foresee anything in the near term that suggests anything that the rate of growth of the hyperscalers is likely to change, and certainly for the next three to five years, I think we’re on an incredible growth curve as these companies are basically insatiable in terms of their requirements.
“Nothing goes on forever, but – to my earlier point – if these hyperscalers end up supplying the world’s computer dial tone down the road, they are going to need space where they can continue to grow,”concludes Levinsky.
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