Commoditization of Colocation: Coming to a Data Center Near You?

13 Jul 2020 by Bob West

Is commoditization about to hit colocation services? Some would argue that it already has. Think about it. What is a data center? Is it not just an industrial building, retrofitted for high power utilization, internet and network connectivity from multiple ISPs? Yes, but there is more to it. They are very expensive to build, located in strategic areas, and feature redundancy at every potential failure point. So technically, not just a building, right?

There are many different definitions of a data center. It is everything from an on-premise telco closet housing servers to an enterprise data center owned and operated by a business unit. Data centers can be public or private. A public data center offers colocation services that allow the data center to be subdivided into a multi-tenant hosting environment that has locking cabinets, private cages or suites, or individual customers. Public, multi-tenant data centers can be built as wholesale colocation facilities for hyperscale cloud providers like AWS, Microsoft, Google Cloud, IBM Cloud, and Alibaba Cloud.

Retail and wholesale colocation markets are more competitive than ever. There are literally hundreds of colocation providers and tens of thousands of data centers in existence today. IT workloads are being migrated directly to the cloud at an astonishing rate. Hardware manufacturers like Dell and HPE are creating new generations of servers that are more powerful than ever before. They are also being virtualized which shrinks the colocation footprint and rack space requirements.

Manufacturers are like NVIDIA are also exploring on-demand, pay-as-you-go, scalable infrastructure options for their customers. NVIDIA is building its own data centers as well as purchasing wholesale colocation.

The Tale of Two Markets

This leaves you with two markets for colocation. It is not exactly black and white but it is getting there. There is still a grey area. Retail colocation customers increasingly have smaller colocation requirements than they have had in the past. Think about it. Do you need an exchange server if your email is hosted in the cloud? Do you need a database server if you migrated your database to a cloud server or cloud database? Do you need a data storage and backup solution or are there better options such as DRaaS?

Retail Colocation Customers

What is running on physical servers in a colocation data center are workloads that perform better on physical servers or that cannot be migrated to the cloud. Another use case is software licensing issues. Some software vendors prohibit their software from being used on multi-tenant, public cloud instances. Security concerns and compliance is another reason why businesses and enterprise customers select colocation over cloud services. However, the requirement for physical servers hosted in a colocation environment is shrinking. Many large businesses have a colocation requirement of fewer than 10 cabinets or 60kW. Medium businesses require just 1-2 cabinets and under 10kW. Most start-ups and small businesses typically require 1 cabinet or less.

Hyperscale Data Center Customers

On the other hand, there is a major growth area occurring for colocation. That area is the wholesale and hyperscale data center market. As business and large enterprise customers migrate IT workloads from on-premise and collocated data centers, they move to the cloud. In turn, cloud service providers (CSPs) like AWS, Microsoft, and Google Cloud require more infrastructure to support demand. Many CSPs purchase wholesale colocation before building their own private data centers. This is used to support their growth until they reach a point where it makes more sense to own and operate a data center. For CSPs, these deals ranging in size from 500kW to 3MW. The majority of wholesale colocation requests are 1.5-2MW in deal size. How many retail colocation data centers have an extra megawatt or two lying around?

What Happens Next? Pricing Pressures

So, where does that leave the colocation industry? You have two extremes, small retail customers and large wholesale colocation opportunities. Here is the kicker. Many of the smaller, older, and perhaps outdated data center facilities cannot support the infrastructure requirements of hyperscalers. They simply do not have the space, power, or infrastructure to support the requirements.

What happens next? You have shrinking demand from retail colocation buyers and increasing demand for wholesale colocation from hyperscalers. It is the large colocation providers like Equinix, Digital Realty, Vantage, Sabey Data Centers, EdgeCore Internet Real Estate, CoreSite, and others are positioned to take advantage of this. Smaller colocation providers will have to focus on smaller customers with smaller requirements.

There are more small colocation providers, data center owners, and operators than large ones. The market is highly concentrated at the top by a few providers. That leaves an increasingly competitive market for the smaller providers and price wars. It is supply and demand principles.

Pricing Transparency

Colocation providers have long resisted sharing any details about their pricing unless they have a qualified quote request. The fear is that it will lead to the commoditization of colocation services.

Colocation pricing has never been standardized throughout the industry. It varies greatly from provider to provider and country to country. Everything is a custom quote despite the fact that many customers have pre-determined space and power requirements such as 2kW and 5kW with 100Mbps Internet. Bundled colocation packages that include the space, power, and internet connectivity are just starting to make their way onto platforms like the Datacenters.com Marketplace despite heavy reluctance.

Why can’t providers offer standardized pricing for their space, power, and internet? It’s a good question. How could they standardize it? Would they even want to?

One way to standardize pricing would be to charge per kW or kVA. Some data centers in Europe already offer this type of pricing for colocation. In this case, bandwidth is a separate charge billed by the telecom carrier or ISP. It would make sense for colocation providers to offer all-in packages on a kW basis. For example, maybe it is $200 per kW which includes the space, power, 100Mbps blended internet and cross-connects. For a 2kW rack, the cost would be $400 per month. For 5kW, the cost would be $1,000.

With IP transit, we are seeing the growing trend of on-demand, pay-as-yo-go, or for what-you-use bandwidth. Could colocation take this same approach? Probably not. Some colocation providers have experimented with metered power to no success. However, most wholesale colocation customers typically pay an all-in cost per kWh.

As much resistance as there is to offer transparent pricing, I feel that change is coming sooner rather than later.

Technology Innovations

Colocation providers need to innovate and adapt to the changing technology landscape. The future is the subscription model. Companies like Rolls Royce no longer charges for their jet engines. They charge for the usage on an hourly rate. Rideshare companies like Uber and Lyft are the future of transportation and charge based on the trip. Is a subscription model for colocation in the cards? Maybe.

We’re also trending towards an eCommerce model for everything – products and services. If you think about it, waiting days or weeks for pricing is ridiculous. This has to be figured out. You should be able to with the click of a button configure your requirements, view pricing, and purchase online. That would take an inventory and pricing management platform for the data centers.

Going to a data center and staging servers, installing, managing, and monitoring them should be a thing of the past. You should never have to set foot in a data center again. What if you could buy your servers, storage devices, and networking hardware online and then shipped it directly to a data center where it was installed within 24-48 hours. TRG Datacenters is one such company that is focused on delivering the “Un-Datacenter” experience to its clients. Simply ship your servers and they will take care of the rest.

Bare metal and hardware on demand are the future. Equinix realized the demand for on-demand, bare-metal servers. Equinix purchased Packet.com for $330M to meet the demands of a new group of buyers – millennials. I have a feeling that other colocation will be following this approach in the years to come.

Last but not least, the edge is coming. Edge computing provides small, regional data centers with the chance to build significant demand from both large and small customers. With the edge, data is pushed and pulled from the user wherever they’re located. Regional colocation data centers will be required at the edge to interact with near proximity users and also to communicate with central data centers in large metros.

Conclusion: Get Ready. Data Center 2.0 Is Coming!

If you want to compete with the cloud, you have to compete with the cloud. The cloud is all about provisioning compute and storage resources on-demand. It’s not waiting six months to deploy infrastructure. The cloud is fully transparent on pricing and allows users to compare options. Colocation space and power availability is a mystery. Pricing is an even larger mystery for the industry.

Need Help? Have Questions?

Are you searching for the best colocation pricing or a custom cloud configuration? We're here to help with your IT deployments. Whether you need colocation or cloud, internet or network, we have the solutions and providers to create a fully customized, end-to-end IT solution for your business. There's no cost to use our services and we can help you streamline your provisioning process. Check out the IGNITE Colocation Projects and IGNITE Cloud Projects to connect directly with top providers.

Author

Bob West

Bob West is a digital enthusiast with a deep-rooted passion for data centers, cloud, internet exchanges (IX) and blockchain. He was a driving force within the original team that built Datacenters.com in 2011. It’s his belief that a new breed of data centers will become increasingly important as we move towards IoT, AI, and edge computing.

Download Resources

Subscribe

Subscribe to Our Newsletter to Receive All Posts in Your Inbox!

Related Categories

Subscribe

Subscribe to Our Newsletter to Receive All Posts in Your Inbox!