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Post-Brexit price hikes hit cloud and datacentre community, as currency fluctuations bite

Cloud and datacentre analysts claim IT buyers are already feeling the pinch from the outcome of the EU referendum, but past performance suggests demand for colocation space will rise in the event of recession

This article can also be found in the Premium Editorial Download: Computer Weekly: How will UK IT adapt after Brexit?

Britain’s decision to exit the European Union (EU) is causing the cost of using US-based cloud services to rise for some UK businesses, 451 Research has confirmed. 

There is a propensity among US cloud firms – including Amazon Web Services and Google – to bill overseas users in US dollars before converting the price back to the customer’s local currency.

As the value of the pound has fallen since 24 June 2016 – when the results of the EU Referendum were confirmed – UK cloud buyers are now reportedly paying more to use US-based cloud services than they were before the referendum.

Speaking to Computer Weekly, Owen Rogers, research director of 451 Research’s Digital Economics Unit, said early market indicators suggest UK buyers are getting less compute power per pound than they were on 24 June 2016.

“On the day of the referendum, £1 would have bought 18.5 hours of operating a US-based, medium-sized virtual machine, based on 451 Research’s Cloud Price Index averages. Today, that same pound will only buy you 16 hours,” he said.

Not all cloud users will be exposed to these types of price increases in the wake of the referendum, but those who previously opted for on-demand pricing plans will need to brace themselves, said Rogers.

“Many [European] users choose the US [providers] as it is cheaper than the rest of the world. Those users who have paid upfront or have financial commitments in local currencies will be protected to some degree. Those who pay on-demand will have to absorb those fluctuations themselves.”

Short-term growth margin ‘squeezed’

Paolo Vecchi, CEO of open source-focused IT provider Omnis Systems, said – in time – cloud buyers that favour UK-based providers could end up eventually paying less for the same services they used to procure from overseas firms.

“We all know US-based cloud providers can be competitive as they are ‘tax efficient’ and have the reserves to finance a below-cost cloud offering until they have killed off any competition,” he said.

“If the financial exchange [fluctuations] cause prices to increase in the UK, then their tax efficiency benefit will level up with the local costs of providing services, so the price element won’t be a choice factor anymore.”

Meanwhile, Kate Craig-Wood, managing director of Surrey-based infrastructure-as-a-service (IaaS) Memset, said the price of acquiring cloud-enabling hardware for her firm’s datacentres has risen by 10%, as the value of the pound has dropped since 24 June 2016.

“All hardware is linked to US dollars and everything is imported, so our hardware costs – which are our biggest cost as a cloud provider – have jumped by at least 10%. On the other hand, our UK competitors face the same problem,” she told Computer Weekly.

“People in the UK buying from us or third parties, such as Amazon, have seen their costs go up too. The net effect is fairly minimal but, in the very short term, that completely squeezes our growth margin.”

Cloudy cost savings

While the cost of using some off-premise services is likely to rise, at least in the short term, fellow market watcher Forrester is urging UK businesses to increase their use of cloud and automation technologies to keep their overall IT spend down in the long term.

In a blog post, authored by Forrester analyst Laura Koetzle, CIOs are urged to forge ahead with their digital transformation plans, despite the uncertainty surrounding how the UK intends to extricate itself from the EU.

“While it’s easy to feel paralysed with so much uncertainty looming overhead, CIOs should not let Brexit derail their business technology agenda. If you do, you risk shrinking your revenue base and losing ground to international competition,” she said.

“Instead, firms should focus on using technologies such as automation and cloud to fully fund the business transformation agenda, retaining top talent and seeking new non-UK talent.”

Plugging the talent gap without being able to tap into the EU’s tech talent pipeline will be easier said than done, Memset’s Craig-Wood continued, as she estimates around a third of the technical staff her company has taken on in 2016 have been EU migrants.

“There is such a massive skills shortage in the UK around technology, and the EU is a really important source of talent for us,” she said.

“We’re going to be struggling even more to get those skills, and it’s already a huge problem. If you look at Linux systems administrators, Python developers and DevOps people with those skills, they are our life blood, and British universities still aren’t teaching those skills.”

Financial services and the colocation conundrum

With the Bank of England’s governor Mark Carney and chancellor George Osborne warning of tough economic times ahead, enterprises CIOs will be looking for ways to make their IT budgets go further, which may naturally pave the way for greater use of cloud technologies and colocation.

Speaking to Computer Weekly, Steve Wallage, managing director of datacentre-focused market watcher Broadgroup Consulting, said the colocation market tends to pick up during times of economic uncertainty, as users look for ways to cut their capital expenditure.

As a result, enterprises tend to curtail any plans they may have to build or reinvest in their existing datacentre portfolio in favour of outsourcing their IT to third-party colocation providers.

According to a report in the Financial Times, published on 26 June 2016, a number of US banking giants that set up shop in London to make trading with the rest of Europe easier are now preparing to move to Paris, Frankfurt and Dublin following the outcome of the referendum.

According to Wallage, there is a risk they could take their colocation requirements with them. “There is a clear risk in the sense that if a bank is doing less business from the UK they will need less datacentre space,” he said.

“One caveat would be that Citigroup set up a Frankfurt datacentre to support ‘Europe’ a few years back, but virtually all other banks have remained with in-country datacentres, with a French facility to support France. So we will still need UK datacentres for UK business.”

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However, Steve Beber, CEO of datacentre asset management company Trackit Solutions, said it is worth bearing in mind that many financial services companies are locked into multi-year colocation contracts, and the effort involved with moving their IT elsewhere means many will opt to stay where they are.

“To migrate and move an entire datacentre of the size used by most financial services companies would take a minimum of one year to plan and execute. London is Europe’s largest provider of colocation space, to think that other markets such as Frankfurt, Amsterdam, Paris and Madrid can simply turn on capacity like a light is unrealistic,” he said.

“If such a thing did occur it would take years, which by that time the political and market uncertainty surrounding the Brexit vote should have settled down.”

Nigel Stevens, managing director of modular datacentre provider IO, was more cautious in his predictions about how the prospect of leaving the EU will affect datacentre strategies of financial services companies.

“We’re now faced with a distinct possibility that institutions may move their data to the continent. Immediately, this could result in increased demand for short-term colocation contracts as financial services companies decide their long-term strategies,” he said.

“The datacentre industry is going to have to be increasingly flexible to continue to grow. We’re entering a period of uncertainty, but datacentres represent the backbone of the UK’s burgeoning tech sector, and are vital to the resilience of public services and the competitiveness of the UK on a global stage.”

Data protection in the post-Brexit era

Uncertainty about what leaving the EU would mean for the UK’s adherence to European data protection laws – particularly the soon-to-be finalised General Data Protection Regulation (GDPR) – has already prompted the Information Commissioner’s Office to issue clarification on this matter.

“If the UK is not part of the EU, then upcoming EU reforms to data protection law would not directly apply to the UK. But if the UK wants to trade with the single market on equal terms, we would have to prove ‘adequacy’,” an ICO spokesperson said in a statement.

“This means UK data protections standards would have to be equivalent to the EU’s General Data Protection Regulation framework starting in 2018.”

At the time of writing, there was still no confirmation about what type of trade deal the UK government hopes to strike with Europe, while rewriting the data protection laws to ensure ‘adequacy’ is achieved is likely to take some time.

In light of this, Rory Delahoyde, managing director of Sheffield-based datacentre provider High Availability Hosting, said there is a chance the demand for in-country hosted data and applications will rise in the UK.

“While Britain remained in the EU there were no issues in holding data in the EU, as we were all bound by the same rules and regulations,” he said.

“The Brexit vote means UK companies will need to find UK datacentres owned by UK companies, with support staff based in the UK to ensure their data not only remains in safe hands, but also to ensure the information isn’t being shared with others.

“The Brexit vote means Britain will be able to develop its own rules, which can only be good news for the UK’s datacentre industry and companies who embrace cloud technology.”

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