Next Generation Data: Amazon Data Centre Tax Break

AMAZON TAX BREAK – By Nick Razey

By devstars 03 | January | 2013

The news that Amazon will be granted a 5 year tax break for its new US Data Centre by the local council in Florida reminded me again that the UK and US are poles apart in terms of the Data Centre industry – something that is not well appreciated particularly in the US.

I have worked in the IT & Telecoms market for 30 years and we have always had the advantage that the US market usually provided an 18 month advance warning of what the UK market could expect – whether good news such as market deregulation or bad news such as a bubble bursting. However this does not apply to the Data Centre market.

This first struck me when I attended the IMN Data Centre convention in New York last year. Over 2 days I listened to presentations from data centre analysts, investors, operators, power companies and local councils. It became clear that the obstacles, issues and barriers to entry we face in the UK do not apply in the US.

Firstly real estate. It goes without saying that the US has abundant land available for development. The UK however, is one of the most densely populated countries in the world with urban land almost unavailable and rural development restricted by “green belts”. The land that is available can cost as much as £1m per acre or more.

Secondly power. The US has multiple competing power companies with their own dedicated grids. These companies recognise Data Centres as a prized customer because of their growing electricity demand and an attractive flat 24 hour profile. At the IMN conference the power companies were there in force offering sweetheart deals to attract new data centre builds to their region. The UK has a single regulated electricity grid and regional monopolies for electricity distribution. The UK’s Power Distribution Companies build 5 year plans based on long term growth forecasts and Data Centres usually pose a planning problem which needs to be accommodated.

Thirdly the attitude of the local authorities is totally different. In the US, states and cities have the power to both collect taxes and offer tax breaks. This gives them both the incentive and the means to attract Data Center businesses. Under the centralised UK system the local councils cannot charge a local tax nor offer any regional incentive. A tax break of the type enjoyed by Amazon is out of the question. At the IMN conference I sat next to a representative of one central US state who had come looking for Data Centre tenants. He proudly listed all the fiscal incentives he had in his goody bag.

Finally there is the funding of Data Centres. The IMN conference showed that Data Centres in the US is an established sector with dedicated analysts, bespoke DC funds, and a breadth and depth of funding options from senior debt to mezzanine to VC, private equity and IPOs. Again, at the IMN conference the funders were chasing the Data Centres not the other way round. The UK has a very thin market in Data Centre stocks and limited debt options. Although the sector is maturing it is clearly more difficult to fund a new Data Centre in the UK.

To summarise a US Data Centre operator can expect to be courted by local authorities with plenty of cheap land, power companies with long term, low cost electricity deals and funders keen to cash in on a hot sector. A wannabee UK operator needs to search for land at a reasonable price, wait 6 months for planning permission, apply for a decent power supply connection and beg for cash. As I said, different worlds. The good news is that a number of operators do have established data centres with capacity for expansion. However with the digital universe doubling every 18 months it will be interesting to see how the UK market copes over the next 5 years.