You’ll agree with me that competing in the data center business is becoming particularly difficult with giants like Equinix and AWS. Most small data center providers feel that with the endless mergers and acquisitions by large companies, they have very little runway left.
It turns out that the best way for small niche data center companies to grow is by offering highly differentiated services. You will learn of examples of companies that are growing by 100% annually by exploiting market gaps that very few data center business know about.
So, what do you think? Is it possible to win in a world dominated by AWS and Equinix?
A Look at Data Center Consolidation Trends Offers Many Lessons for Data Center
Data centers help power websites, mobile phones, and driverless cars that are increasingly vital for everyday commerce and technology advancement. CBRE reports that by March 2018, at least $4 billion was spent on data center acquisition in North American alone.
This means that there is a likelihood that 2018 will see data center deals in excess of $20 billion.
That’s not all…
Amazon, Equinix, and other data center providers such as Google and Microsoft are acquiring data centers that were once owned by Fortune 500 companies and for whom it makes no sense to run the facilities anymore.
This is because large companies like Google and Equinix offer opportunities of scale, resulting in data center services that are cheaper than their smaller data center providers.
The cloud is also important for startups in Silicon Valley which build apps and services using cloud services from the large data center providers.
In 2017 alone, an unprecedented 48 data center M&A deals were closed, which was more than the closed deals in 2015 and 2016 combined. The sudden increase in M&A deals is driven by an increased demand for outsourcing services for enterprise data.
The two largest data center providers, Equinix and Digital Realty, spent more money on M&A than all other companies in the industry, totaling $19 billion between 2015 and 2017. However, there is a difference in the approach used by each company.
While Equinix purchased companies from all reaches of the globe, Digital Realty mainly acquired data center companies in North America. The largest purchase in 2017 was by Digital Realty when it paid $7.6 billion for DuPont Fabros Technology.
The value of individual deals in 2017 was also high, as 31 of the 48 deals made being worth at least $100 million each. In the past three years, there have been lots of mergers and acquisitions in the data center business.
Big companies are acquiring small companies in order to reduce competition, and simultaneously increase their revenue streams.
Here’s the deal…
An important driver in the increase in mergers and acquisitions of data centers is that customers want to reduce the number of data center providers they deal with.
While customers would hate to have one or two firms monopolize the industry, they definitely do not want to deal with ten data center providers.
Here’s Why a Highly Automated Cloud Can Benefit Your Customers and Increase Revenues
When moving their services to the cloud, companies quickly realize how important automation is. Software-defined environments need automation for application deployment, cloud service delivery, usage control and for security.
Why is this important?
Automation is fundamental to realizing the benefits associated with the cloud. It is very possible to deploy cloud infrastructure using code. There are many ways of deploying and configuring infrastructure and applications.
Most of the big companies offer continuous integration and continuous delivery (CI/CD) using “infrastructure as code” deployment. Just these two processes create an avenue to operate systems at scale, which is not only self-healing but also has rapid release functionality.
With automation, developers can deploy and configure networks, databases, security and operating systems just by using a few API calls and keystrokes.
I can’t emphasize this enough:
AWS and Equinix make it very easy to use infrastructure as code through tools like AWS CloudFormation. As such, developers have several options when implementing their cloud environment, using the major programming languages like Java, Python, JSON, and NodeJS.
Some of the automation tools AWS offers include Puppet, Ansible, and Chef. While the time needed to complete the transfer to the cloud depends on environmental complexity, the tools AWS and Equinix provide make it easier than a traditional deployment operation.
How Managing Complex Workloads for Clients in the Cloud Offers Tremendous Opportunity
Data centers companies that are poised to grow are those that help clients to manage complexity. Companies are trying to move complex applications to the cloud.
Conventional insurance companies, manufacturers, and banks need lots of help as they try to update their infrastructure.
And herein lies the opportunity…
It is unlikely that Amazon or Equinix will sit down with every client to discuss their needs on migrating applications to the cloud and configuring them.
Even with the level of automation and the number of raw materials that Amazon and Equinix avail, there has to be an intermediary between the data center providers and the client to make everything work.
While large colocation companies are trying to expand their revenues from enterprise customers, these large companies don’t address all their needs.
Good examples of companies that offer highly differentiated data center services include DigitalOcean and Packet, whose primary focus is on developers although each uses its own unique ways.
Another company that is a good example of service differentiation is Vultr, whose cloud platform is designed to make it easy for clients to set up and deploy popular applications like game servers, WordPress sites, and developer environments.
The best part?
Small data centers who do their due diligence and have sound strategy will identify many needs that giant data center providers don’t satisfy, and will have profitable businesses in the long-run.
On the other hand, small data center providers who compete with established giants in offering raw materials such as dedicated servers will have a difficult time, as most customers will go for the bigger companies.
It is clear that what customers truly want is to improve their IT capabilities, and not just to own them. As the demand for outsourcing services increases, it is expected that the number of data center M&A deals will increase.
Experts predict the next five years will feature a sharp increase in the number of data center M&A deals.
The Big Players are Exploiting Secondary Markets and Why You Too Should Do That
Another sign that there is still room for expansion is that huge companies like Equinix are planning to expand their services to other areas like Minneapolis, Phoenix, and Denver.
As these large-scale platforms migrate their services and content into rural areas to reduce bandwidth costs and reach more customers, secondary markets will continue to expand rapidly.
Why does this matter?
Small data centers are better suited to helping customers have better connectivity than giants like Amazon and Equinix, they can leverage this growth.
While expanding their operations, data center providers should be ruthless when it comes to streamlining design and cutting down on costs.
A great example of a data center provider that focuses on cost reduction is CyrusOne, who consider their approach to cost reduction similar to GE building a jet engine, and as such have to squeeze every last ounce of power while keeping the engine economical.
As demand for data center services increases, there is no question that they will consume more megawatts. However, data centers should find more ways to reduce costs.
A Lesson on How to Run a Profitable Data Center in Developing Countries
The expansion in data center services is not just in developed countries, but also in developing countries such as in Africa. For example, the South African company Teraco is expanding its data center business in Cape Town.
In the recent years, Teraco’s power consumption has increased to nearly 50MW, a figure that has been doubling since the company’s founding in 2008. In 2017, Teraco got a $90 million loan from Barclays to expand its operations and presence on the continent.
Why is this important?
Data center businesses can look to Teraco as an example of how to offer niche services. Teraco decided to become a Microsoft Azure ExpressRoute connectivity partner.
As such, this allows customers to connect to a high-performance private connection to Microsoft Cloud Services. The expansions to Teraco are expected to make the company five times as large as it was originally planned during its founding in 2009.
As of today, Teraco operates four operational data centers. 2017 saw the colocation market in Africa grow by 15.8%, and South Africa was the country in the region with the highest growth. South Africa is also ideally situated to serve sub-Saharan Africa.
But here’s the catch:
South Africa’s colocation sector is larger than the next 20 African countries’ collocation centers combined. In future, IT architecture will drive power density demands in ways that have not been seen in traditional data centers.
Even though Equinix and Amazon dominate the data center business, there are many opportunities that small data center companies can exploit. Large companies cannot sit with every company and cater for all their needs as they migrate to the cloud.
Smaller data centers can take advantage of areas that large players cannot fill rather than compete in areas that the large companies offer economies of scale, such as in raw materials and automation. Instead, they should offer highly differentiated services.
Data center mergers and acquisitions are likely to increase in the next five years driven by the large company needs to eliminate competitors and increase their revenue streams. Therefore, it is possible to win in a world dominated by AWS and Equinix.