Posts Tagged ‘Digital Realty Trust’

Asia – the Wild, Wild West of Opportunity

Thursday, July 11th, 2013

As I led Global Data Center Strategy and Development for Yahoo!—a position that I immensely enjoyed and would love to do again—I developed, sought out and negotiated data center capacity in over 20 counties. And of all the regions, Asia was by far the most challenging to find large blocks of good quality data center capacity. I spent much time looking for data center capacity to lease in Hong Kong, Taiwan, Singapore, Japan, Korea, and India. (China was a separate entity.) I have taken countless trips to Asia since 2004, and during my tenure at Yahoo!, I traveled to Asia every month (as well as elsewhere).

Due to this limited supply of high-quality data center capacity, I was willing to take down futures on good quality data centers to be built in Asia, especially those with network neutral connectivity, which can be difficult to find in many Asian countries due to limited access to cross-country networks except by incumbent network providers. My counterparts at Google and I were almost always rushing to get into the available data centers in these regions before each other, so I was always so surprised that the US data center providers were not rushing to build strategic capacity in Asia to take advantage of these business opportunities.

Although data center capacity in Asia has been continually added faster than probably any other global region, demand still persists for good-quality, network-neutral data centers throughout Asia. This is evidenced by correlation to network growth mentioned in this statement about Equinix expanding in Osaka: “Osaka is Japan’s second largest economy after Tokyo and saw internet traffic grow a staggering 68 percent and bandwidth increase at a compound annual growth rate (CAGR) of 56 percent from 2008 to 2012 rivaling Tokyo.”

In large, mature and well-developed markets such as Osaka, intrinsic organic market demand doesn’t grow by 56% CAGR, so this indicates to me that there is likely unmeant demand finally being absorbed by new capacity. I believe that the same is true for other recent data center expansions in Asia by Equinix, Digital Realty Trust, and others.

Other locations, particularly Brazil and Mexico, have also been seeing tremendous growth that has been fairly unmeant by high-quality US data center providers. This has also been a challenge for other global locations. So even though US and non-US data center providers have been adding capacity and finally expanding into new global markets, it isn’t enough to have met and continue to meet new demand in these non-US markets.

It’s well beyond time for US data center providers to change their US-centric focus on US locations and take advantages of the many opportunities outside of the US, which can not only provide excellent revenue and margin growth, but also benefits of customer retention and new customer acquisitions, as well as network interconnectivity and market share dominance. All of these being immensely valuable in a much more competitive and global marketplace than it was even just a year ago. It’s time to smartly expand globally to gain many great advantages and cease the ultra-conservative approach that misses market share, revenue and margin growth opportunities for high-quality data center providers.

I hope that I can help guide some of these providers with these new opportunities and also the end-users find the best providers in these growing data center locations. Growth opportunities are nearly boundless in this global market. Now get out there and grow!

Equinix has a Bad Market Day

Friday, October 8th, 2010

Equinix had a bad day Tues, with stock price dropping by about a 25% in one day and not recovering since. This dramatic price drop also affected the stock value of many prominent public data center companies or data center centric companies. The Equinix price drop was created from a revenue warning from Equinix and a lawsuit filing questioning churn and revenue forecasts. The market is clearly jittery about any uncertainty in the revenue filings and forward expectations of margin and revenue for what has been a very robust company and market segment. These questions have hurt all companies in this segment. My analysis, and this is purely my analysis and opinion as an industry person, not a recommendation or investment professional report.

Equinix has always reported churn to be very low and that it’s customers have a certain stickiness due to its collection of network providers at each site and the group of core customers attracted to be in Equinix for peering with each other. And while I have been saying for years that fiber is ubiquitous, adding insignificant dollars to large data center projects to bring fiber to even remote sites, as a past large customer of Equinix, I can attest to the value of these peering relationships and network options. However, while there is great value in these network connections, they can be accomplished with little equipment, a rack or two. Meanwhile, the rest of the customer’s servers are located in a lower cost wholesale or internal data center (I’m referring to large users). And as networking technologies and equipment improve and shrinks in size to accomplish the same number of connections, “network” customers of Equinix need fewer racks for these networking connections. A past 2-4 rack requirement is now 1-2 racks, so churn is not loss of customer but a decrease in the number of racks. Meanwhile, that customer may add more cross-connects to peer with more Equinix customers in the same data center, further entrenching the “network” community that is there to peer with each other. And each of these cross connects is fairly low monthly recurring revenue (MRR) yet pure margin, so Equinix maintains high margin even if total MRR declines slightly over time. Overall, a good business model that retains high margins even if revenue falls slightly.

The challenge for Equinix is to grow MRR as customer equipment shrinks, since Equinix sells mostly space in a power driven world. Also wholesale providers are selling to customers with 20+ racks instead of what was the minimum buy in at about 100 racks. So the wholesale and other data center providers are closing in on the smaller rack customers that are core to Equinix while Equinix has not moved up in size to competitively serve the larger rack customers, those with over 25+ racks, as the wholesale providers serve those customers at significantly lower costs. As large rack customers of Equinix migrate to wholesale providers, they keep up to a few racks to maintain networking connections with high margin but Equinix looses market share and larger revenue customers, essentially driving Equinix to their core business and core high margin customers with a few racks and lots of cross connects, exactly what they want purging the large customers with dozens of racks at a lower MRR per rack. So while rack churn sets in customer stickiness remains. Summary point: Network is ubiquitous; most don’t need 20+ carrier connections; those that do keep a networking rack or two for peering and networking connectivity and maybe caching servers; rest of racks move to lower cost centers

Separately, cloud providers continue to move in to Equinix, an excellent growing customer segment for Equinix. But I predict that as these providers get large in the number of racks, where it becomes lower cost to relocate to a wholesale or other lower cost provider, they will. I used to work for Exodus Communications who started the co-location market and I also ran a data center co-location company several years ago, and as a past large customer of Equinix, DRT, DFT and many others, and also ran data center operations for one very large Internet play and once very large software provider, so I am familiar with the challenges of moving racks from one location to another. This challenge adds to the stickiness of customers and limits churn. But as customers grow and add new servers, customers can add new servers in new locations via cloud and with the help of virtualization and quickly have them virtually replace servers else where, making transitioning from one data center to another a much easier task, whereby primary servers can change from one data center location to another, and then be physically taken offline, making data center transitions much easier than before. This is especially true as more and more folks do not rely on the one data center basket for all servers, and instead, of multiple, geographically diverse data centers that load balance and fail over to each other in real time.

A couple of final points. I like Equinix; I believe they have an excellent product and a very high margin business. While being very focused to retain margins they have missed what I believe are revenue growth opportunities in booming Asia and with larger rack customers albeit at lower margin. Also, the intense focus on networking hubs has forced them to have data centers in high power cost markets, which directly and significantly affects COGS while corporate data centers have been moving out of metro areas to rural areas for cost benefits. This brings better fiber to those areas and “known-ness” to those areas as we see with data center bunching, for better of for worse in places like Central Washington, Utah, Reno, North Carolina, etc. Equinix is limited by their focus on network and high margin to metro areas, again further limited revenue growth and having a higher impact from high power costs and market share loss to those moving to lower power cost centers. This will help them retain margins while likely loosing market share, so I see Equinix’s value in high margin with less revenue growth—a result that should be valued but we’ll see what transpires over time, as many investors have often been more focused on revenue growth. Let’s hope all data center stocks are not devalued and that revenue forecasts are accurate as possible to maintain the proper value of these data center companies.

You can read more via these fine articles here and here:

Also, be sure to register for the SVLG Data Center Efficiency Summit on October 14th in San Jose, as registrations are expected to be sold out soon.