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The Impact of Hyperscale Clients on the Market

 
Jul 13, 2017
by Brian Klebash

CHICAGO, Illinois – To many in the industry, the large, hyper-scale customers like Facebook, Microsoft, and Google are a necessary evil. Fifteen years ago, those firms were all outsourcing their colocation. Then, they blanketed the world with built facilities. Now, colocation seems to be back on the rise. So it leads many of us to wonder, where are they going to go next? Are the big firms just going to out task their data center facilities for complexity, or are they going to swing back and go on a building cycle again?

James Leach, Vice President of Marketing for RagingWire Data Centers doesn’t think they are crazy or  fickle. “One of the great things about the data center industry is the data center community,” he says. “Whether at one time you are a supplier or a buyer or an analyst or a strategy officer, I think we’re all in this together. We have found at Raging Wire that the dialogue with big companies is really positive and really constructive. Does it always end up that you win a deal? No, you don’t. But you always learn a lot from them. They have good strategies in place. At times they might be moving a little bit faster in a build vs a buy vs another strategy, but I think that the whole momentum going forward, collectively, is a positive thing.”

Jonathan Schildkraut, Chief Strategy Officer for CyrusOne largely agrees with this perspective. But thinks it’s unwise to basket all of these companies and say that they’re all going to do the same thing. “Broadly speaking you’re going to see a mix of building and buying,” he begins.  “But ya know, for some of the hyperscale firms, it’s sort of a religious thing, if you will. They want to build their own assets – that’s just where they want to be ultimately. And others, such as Microsoft, have gone away from building at all.”

Schildkraut refers to Microsoft’s latest financial report, where they reported $2.1 billion of capital leases, and if you go back a year or fifteen months ago, they reported under $200 million. “Clearly there’s been a huge shift in how they view the world, and taking on incremental capacity,” he says. “But in the footnotes, it’s even more interesting. They’ve got another $4.2 billion of capital leases that they’ve signed onto that have not even commenced. So, it seems like Microsoft has swung pretty aggressively in one direction, and some of the other guys still want to build their own, and there’s everything in between. But I think over time you will still see a good bit of outsourcing.”

There are three reasons why we’ve seen this uptick in outsourcing, according to Schildkraut. First, there are logistical challenges with trying to deliver significant capacity across a number of markets simultaneously. “So taking advantage of our industry, in order to become part of that logistical solution, is incredibly important” he says.

The second reason is that there is a much better opportunity to match the spending needs — that is, as you go out and you meet a resource, you can match your capital deployment much better with that resource need – by using outsourcing. “In our industry, if you’re going to build a billion-dollar, state of the art facility somewhere, you’re going to move that capital out probably long before you need that capacity,” he says.||

Finally, Schildkraut thinks that the architecture of the third-party data center market has changed pretty dramatically over the past couple of years. “I know there has been some issues with regards to supply and vacancy, but just a couple of years ago, the industry would build, let’s say, the “most-common-denominator” type of data center, so that any type of customer could be in there, whether it was enterprise, or they needed high resiliency, or whatever.”

Schildkraut says that the problem with that build is that you end up building to your least resilient application. “When you look at some of these hyper-scale buyers, they are putting their resiliency inside the distributed nature of their architecture, and not on the asset player. So, we have evolved as an industry from, I don’t want to say build to suit, but almost build to spec, where we can take into account the needs of some of these hyper scale buyers,” he says. “And in doing so we can better match some of their cost structure on the capital side, as well as on the other side.”

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