Cloud Computing drives concentration of data center co-location services

Posted by Mike Vizard on Jan 6, 2015 8:43:27 AM

The rise of cloud computing appears to be driving a wave of ongoing concentration across the traditional data center co-location market. A new report from 451 Research finds that six percent of the vendors providing these services now account for half the $25 billion in revenue being generated.

According to the latest data culled from a Datacenter KnowledgeBase (DCKB) created by 451 Research that spans 3,685 individual data centers from 1,086 global data center companies, the top 10 players account for 28 percent of the $25 billion in revenue and the top 60 players account for 52 percent of the $25 billion in revenue.The report finds that more than 1,000 additional companies generate the remaining 48 percent of revenue.

4381851322_d46fd7d75e_zIn general, cloud computing has been a double-edged sword for providers of co-location services. On the one hand, demand for co-location services has never been higher, especially as IT organizations looks to embrace private clouds running on infrastructure-as-a-service (IaaS) in 2015.

But most cloud computing contracts are shorter term than, for example, a multi-year hosting contract and the line between what used to be a high-margin managed hosting contract and managed cloud computing services is rapidly becoming indistinguishable. The end result is a greater concentration of application workloads in the hands of a smaller number of co-location data center operators with financial pockets that are deep enough to compete on pricing over the long haul.

In fact, the larger those data center installations become the easier it is for the operators of those data centers to leverage scale to drive down pricing even further. Of course, the location of those data centers tend to matter just as much as cost. Data centers that are close to Internet peering exchanges tend to be more desirable because they are one or two network hops at most away from the core Internet.

In addition, thanks to the rise of data sovereignty issues many countries now require data that is created in their local market to be stored there as well. This not only creates demand for local data centers, it fuels interest into operators of data centers that have the farthest flung geographical reach.

As awareness of the difference between public and private cloud computing grows it will be interesting to see what the ultimate impact on demand for co-location services actually is. In the early days of the cloud it was not uncommon for a customer to initially inquire about cloud computing to wind up with a managed hosting contract. But as IaaS becomes better understood, it’s clear more production applications are heading into the cloud, especially as the cost of IaaS offerings continues to drop.

Even so, it’s clear that more than 1,000 companies continue to deliver co-location services. There may be some notable mergers and acquisitions across this category in 2015, but it’s unlikely that hundreds of data center operators across the globe are going to disappear any time soon. In fact, 451 Research reports that there has not only been 176 known facility expansions in the last year, another 134 new data center facilities came on line last year. Obviously, some of that activity represents consolidation of existing data centers. But it’s not necessarily the number of data centers as much as the amount of compute capacity that can really be delivered at the end of the day that matters most.

Photo Credit: Leonardo Rizzi on Flikr. Used under CC 2.0 license

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Topics: Cloud Industry and Technology

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