“A reliable data centre is not a luxury. An unreliable data centre is not a commodity.”
NICK RAZEY | THURSDAY 26 JUNE, 2014
At the heart of the IT stack there’s usually a data centre and some might have us believe that it can be any old data centre. Not so, says Nick Razey. Indeed, he argues it may be the supposedly high value items higher up the stack that are more like commodities.
For those working in the fast moving world of cloud computing it is easy to take the view that the choice of data centre is irrelevant; that although it is an essential piece of the jigsaw, one data centre is just the same as another when compared to the complexities of differing IaaS and SaaS (Infrastructure/Software as a Service) and platforms. On this basis it is assumed that all the value in the IT chain will migrate to the cloud providers leaving data centres to earn meagre commodity margins.
Nothing could be further from the truth. It’s far more likely that cloud services are the next commodity and it is cloud providers who will see their margins competed away while data centres remain relatively unaffected by the new IT world.
That’s because cloud services do share some of the characteristics of commodities. One virtual machine is the same as the next; their supply can be scaled up and down and they can be bought and sold on a short term “spot market” basis. Moreover, the barriers to entry in cloud services are very low. A fully-fledged cloud service can be offered using a single rack, a couple of servers and some storage and, with current prices, good margins can be made. As a result there are already hundreds (maybe thousands) of cloud service providers and more are emerging each day.
The data centre, however, is a very long way from being a commodity. A commodity typically has three characteristics; the product is the same, the quality is the same and the price is the same. And because the products are interchangeable, they are usually bought and sold via efficient spot markets which exactly match supply and demand and which prevent any suppliers earning excessive returns.
Data centre products vary in many ways such as Tier level, space and power capacity, connectivity options, service levels and location. A good data centre service also needs well-trained staff and embedded policies and procedures. These parameters directly affect both the quality of the product and its price, although I always find it surprising that it is the data centre’s location more than its quality that dictates price.
Although the data centre market has seen new aggressive players offering very low pricing, most buyers are too cautious (and savvy) to automatically choose the cheapest option. By comparison if a new, cheaper brand of petrol emerged most of us would be happy to use it.
The data centre market, by its nature, is also a very long way from offering a spot market. For suppliers, the high upfront investment and economies of scale inherent in data centre provision mean that data centre capacity cannot be scaled up and down to match demand. Instead, data centre operators seek to lock-in customers with long term contracts which will guarantee return on investment. Furthermore the barriers to entry for new suppliers are high.
Not only does a data centre require suitable land, a good power supply and planning permission, it demands an upfront investment of well over £10m. This is not for the faint hearted and while there are new entrants they have not changed the market paradigm.
For customers, the cost of transition from one data centre to another is so high that they will not move their IT overnight if a new, better and cheaper option comes along. Instead they will wait for a natural break such as a technology refresh (and/or the end of a contract) before moving.
This inefficient and slow moving data centre market explains why the 40 to 50% EBITDA margins of the established data centre players have not been competed away by a rush of new competitors as economic theory would expect.♥
Nick Razey is co-founder and CEO of Next Generation Data, the owner and operator of Europe’s largest data centre, NGD Europe.
Also by Nick Razey on The Stack