December 4, 2013 Companies: AMZN, CCOI, CONE, COR, CTL, DFT, DLR, EQIX, ETR:DB1, GOOG, IBM, INXN, LON:DAY,

LON:TCY, LVLT, MSFT, QTS, RAX, T, TYO:9433/KDDIY, VZ, WIN

Data Center Space Still in Demand But Colo Model Being Challenged

REPORT David Franklin, df@blueshiftideas.com, 215.493.4104

Summary of Findings Overbuilding and increased competition are not yet commoditizing

the data center industry. However, some regional markets do have excess capacity, which pressures pricing until the space is filled.

Eighteen of 26 sources do not think overbuilding is an issue, while eight sources view excess regional capacity as a strain on pricing.

Carrier-neutral services no longer can command a premium price because customers now expect multiple carrier connectivity.

Value-added services that can ensure premium pricing include location, facility age, staff quality, reliability, cloud and hybrid services, operating history and contract flexibility.

Demand for data center services is strong and is driven by greater use of the cloud and enterprise IT outsourcing.

The leading providers are CoreSite Realty Corp. (COR), Equinix Inc. (EQIX), TeleCity Group plc (LON:TCY), CyrusOne Inc. (CONE), Digital Realty Trust Inc. (DLR), DuPont Fabros Technology Inc. (DFT) and Amazon.com Inc.’s (AMZN) Amazon Web Services.

Emerging trends include modular design, “green” data centers, enterprise IT’s growing adoption of data centers and the cloud, and the effects of data center infrastructure management (DCIM).

The data center industry now must face Open IX, a nonprofit association designed to ensure Internet exchange neutrality and to add consistency to exchange pricing. Also, Deutsche Boerse Group (ETR:DB1) intends to offer a cloud commodity trading exchange. The transparency required to participate will challenge industry leaders and could provide opportunities for competitors.

Overbuilding Leading to

Pricing Pressure

Carrier Neutrality a Premium Service

Carrier-Neutral Data Center Customers

Data Centers

Carriers

Industry Specialists

Research Question:

Are overbuilding and increased competition commoditizing the data center industry and challenging the premium price that carrier-neutral data centers can charge for their services?

Silo Summaries 1) CARRIER-NEUTRAL DATA CENTER CUSTOMERS Five of six customers said an overbuilding of data centers has not occurred and that prices are firming up. The remaining source, located in Mexico, said facility building is ahead of demand by about two years. Carrier neutrality is considered the norm, and premium pricing is possible only for value-added services. Key competitive and pricing differentiators include location, reliability, cloud and hybrid offerings, and contract flexibility. 2) DATA CENTERS Five of these nine executive sources said regional overbuilding of data centers has occurred, while the remaining four said overbuilding was not an issue. Sources also varied in their opinions on pricing trends. Connectivity and carrier neutrality still are important to customers and can command a premium price. The data center industry is undergoing several changes with providers mixing and matching services in an effort to maintain or grow market share. As they add more efficient technology that takes less space, they also are adding applications that offer better or fuller service their customers. 3) CARRIERS Overbuilding of data centers is not a problem, according to three of these four sources. Carrier neutrality is now the norm rather than an advantage, and key pricing differentiators are advanced services such as cloud offerings and high-quality staff. REITs offering lower-density colocation services are expected to struggle. Two sources said prices have fallen 2% to 10% while another said prices are firm and likely will increase 3% to 5% per year because of annual contract escalation clauses. Demand for data services, particularly multitiered hybrid solutions, is growing as large enterprises look to outsource IT applications. 4) INDUSTRY SPECIALISTS Six of these seven sources do not think an overbuilding of data centers is occurring. The remaining source has seen some overbuilding, which is leading to a highly competitive market and pressured service pricing. The carrier-neutral capability that once commanded a premium price is no longer a competitive advantage. Key differentiators now are financial stability, facility design, staff quality, and performance history. Of the five sources commenting on pricing, three indicated strong competitive pressure, one said pricing is based on the cost of labor, and one thinks the cost of power is the primary price driver.

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Data Centers

Background Blueshift Research’s April 4 report showed Equinix as the clear North America leader; its desirable locations and carrier relationships have helped it command as much as a 20% premium price. Equinix beat its third-quarter earnings estimates by posting 10.6% revenue growth year to year, but management acknowledged a decrease in the size of average deals. The company has experienced a segmented market, with customers seeking either low-cost data center services or more sophisticated infrastructure strategies such as multitiered architectures and hybrid clouds. With this industry shift, a more-competitive landscape is emerging in adjacent markets such as cloud services in wholesale colocations. Competition for carrier-neutral data centers has grown substantially over the past years as more companies join the fray while existing players continue to expand with no signs of slowing. Sources in April said competitors worth noting were CoreSite Realty, KDDI Corp.’s (TYO:9433/KDDIY) Telehouse, DuPont Fabros, Digital Realty Trust and Sabey Corp. One source said Verizon Communications Inc.’s (VZ) purchase of Terremark may allow it to push preferential offers and to gain new customers in Latin America. Meanwhile, TeleCity is expanding in Finland, and InterXion Holding NV (INXN) plans to build its ninth data center in Frankfurt. China’s largest data center came online in October, and CyrusOne reached a milestone of 1 million square feet of data center space in October. CURRENT RESEARCH In this next study, Blueshift Research assessed whether overbuilding and increased competition are leading to the commoditizing of the data center industry and if carrier-neutral data centers still had the ability to charge a premium price. We employed our pattern mining approach to establish and interview sources in five independent silos:

1) Carrier-neutral data center customers (6) 2) Data centers (9) 3) Carriers (4) 4) Industry specialists (7) 5) Secondary sources (7)

We interviewed 26 primary sources, including two repeat sources, and identified seven of the most relevant secondary sources focused on data centers and the IT industry.

Next Steps Blueshift Research will continue to research how the data center industry is affected by competition and regional capacity issues. We also will monitor the emerging trends of modular data center design, green data centers, enterprise IT’s growing adoption of data centers and the cloud, and the effects of DCIM. Finally, we will determine if any data center provider is introducing a technology that could provide a competitive edge.

Silos 1) CARRIER-NEUTRAL DATA CENTER CUSTOMERS Five of six customers said an overbuilding of data centers has not occurred and that prices are firming up. The remaining source, located in Mexico, said facility building is ahead of demand by about two years. Carrier neutrality is considered the norm, and premium pricing is possible only for value-added services. Key competitive and pricing differentiators include location, reliability, cloud and hybrid offerings, and contract flexibility. Green data centers are a growing trend. Data center providers of note are CoreSite Realty, Equinix, TeleCity, CyrusOne and Cervalis LLC.

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KEY SILO FINDINGS Data center market conditions

- 5 of 6 sources do not see an overbuilding of data centers. - 1 said overbuilding has occurred and has led to falling prices in Mexico. - All 6 sources reported strong demand for data center services. - Value-added services and contract flexibility—not carrier neutrality—are the key factors.

Carrier-neutral and carrier-specific capacity trends - 1 source reported overbuilding in Mexico, but expects demand to catch up within two years. - 1 source said some industry consolidation is underway and that some rack space is freeing up as a result.

Carrier-neutral and carrier-specific pricing trends - 5 of 6 sources reported firm pricing. - 1 source in Mexico reported declining pricing due to overbuilding. - 5 sources said location, value-added services, contract flexibility and quality staff are key factors. - 1 source views carrier-neutrality as a premium offering.

Future data center trends - 1 source said blade-based infrastructure was a growing trend during the past two or three years. It requires more

power and cooling. - 1 source expects green data centers to be an important trend.

1. Business development executive, cloud services provider with data center operations in the U.S. and UK

Data center location and reliability continue to be key differentiators, but flexibility in contracts and the ability to offer an ecosystem of services, especially cloud vendors, are growing in importance. CoreSite Realty has emerged as a leader in embracing cloud platforms among U.S. data center owners. It also offers an attractive metered pricing system for power consumption. All of the data center expansion is a sign that the demand for more space is present, and pricing likely will not fall significantly in the next few years.

Data center market conditions “The differentiators right now are the same things companies have looked

at for the last five years: location, connectivity, access to peering, availability and flexibility in contract.”

“Having a carrier-neutral location for us is really big. We’ve built our network on the backbones of Level 3 [Communications Inc./LVLT]; AboveNet, which is now Zayo [Group LLC]; and Cogent [Communications Group Inc./CCOI]. So we offer three different carriers on our base service. … Organizations that have invested in MPLS or private networks, if they’re doing point-to-point connections … it’s a major advantage for a cloud company.”

“Providers are realizing that specifically [cloud infrastructure] is a growth sector for them. You’re seeing a lot of the carrier-neutral data centers like CoreSite or TeleCity over in Europe. They’re seeing value in creating more of a marketplace that hopefully provides some pull-through opportunity for us. If we’re a tenant and they can advertise what cloud service providers are in their facilities, it could provide additional opportunities for their enterprise and media-type clients.”

“[Data centers offering cloud services] is a trend that we’re seeing proliferate, but it varies as to how seriously they’re taking that. An example would be [The] Telx [Group Inc.], which has a cloud exchange. They’re trying to do the same thing for cloud like they’ve done with their ability to cross-connect to multiple carriers, but they’re not actively engaged in promoting it. It’s more of a hype thing.”

“At the opposite end of the spectrum, CoreSite sees [cloud services] as something strategic to their business. There’s a lot of new management in the last couple of years from Equinix, and they’re really going after it. They’ve built a platform, and they offer programmatic ability to scale connectivity straight through an API. They’re really reaching out to their partners and trying to get these relationships going.”

“TeleCity in the UK just came out with Cloud-IX, their [cloud ecosystem] play, in the last month. It’s a trend. Are we seeing a lot of transactions flying across the wire yet? No, but they are definitely connecting the dots. Companies like

The differentiators right now are the same things companies have looked at for the last five years: location, connectivity, access to peering, availability and flexibility in contract.

Business Development Executive Cloud Services Provider

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us are super-excited because if a byproduct of working with a company is we get great connectivity … and our provider has a vested interest in growing our footprint, that’s awesome.”

“These [data center] companies are already selling on the concept of who’s in their site. CoreSite has been doing it for over a year. Telx has been doing it for a couple of years, though I don’t know how successful they’ve been. Equinix has been pushing it for a while. TeleCity is just formally doing it now.”

“We’re excited about some of the things we hear from Equinix and we see some value with CyrusOne, but we haven’t done business with either yet. CyrusOne doesn’t do anything associated with remote hands or help with the buildout. That’s an extra hurdle if you’re going to consider them for space, whereas others will help with the buildout.”

“Flexibility in the contract, setup and scale is a really big thing for providers like us. For an enterprise, their needs may be more static. For a service provider, we’re going in there with the best intentions, but we have no idea how fast we’re going to scale at that particular location.”

“In the U.S., as far as people we do business with, CoreSite is out there doing a great job. There have been a lot of changes in management there over the last couple of years, and I think the direction they’re taking is really, really strong. I think you’re going to see a real strong performer there.”

“In Europe, TeleCity has been fantastic. … They follow process. They’ve got every certification under the planet and there’s no exceptions. TeleCity I would put at the pinnacle, with CoreSite slightly behind them.”

Carrier-neutral and carrier-specific capacity trends “Data center operators are continuing to invest in growing out footprints.

There’s definitely a lot of investment going on. CoreSite in Reston [VA]—we were an early tenant there years ago. They’ve had so much success that they’ve added two more stages to that facility. TeleCity, same thing in London in their Powergate facility. They’re increasing that site by 2X. They’re in the process of subscribing phase 2 and already building out phase 3.”

Carrier-neutral and carrier-specific pricing trends “Pricing models are getting better. Companies like Telx … don’t have as

nearly a favorable pricing model as someone like CoreSite, where you can actually consume power based on metered usage, which is better in line with how we scale. Companies like CoreSite are putting that type of pressure on others in the space.”

“The power piece is not new. It’s been around for years. If you’ve got a provider that understands that and is willing to scale it over time and charge you based on usage, that’s definitely a differentiator.”

“TeleCity doesn’t have the same billing methodology around power. For future growth, for us, they’re out.” “I just don’t see prices declining significantly in the near future. There’s so much growth out there. Our segment is

probably the latest growth segment. All the hype is out there around the cloud. But if you just look at the growth of data in general, it’s insane.”

“The other pricing aspect that we’re seeing rear its head more and more is flexibility. [A data center customer may] need six cabinets to start, but they may want the ability to grow at this site by 5X in the next couple of years at whatever frequency makes sense based on how successful they are. Data centers are having to put in some flexible contract terms that say, ‘We’re going to grow with you and we’ll review it annually or every six months. We’ll basically give you first-rights refusal on that much space.’”

Future data center trends “The trend for density to become consolidated is absolutely real. We’re able to get 10 times the amount of virtual

machines into a cabinet than we could three years ago.” “The technology is creating more and more density, which drives a different type of power concern and draw, but at

the same time blades within that infrastructure provide an opportunity for higher efficiency. We’ve looked at moving to a blade-based infrastructure every year for the last five years, but this year we finally did it because we were able to get the density we wanted and keep the power draw within a reasonable range.”

I just don’t see prices declining significantly in the near future. There’s so much growth out there. Our segment is probably the latest growth segment. All the hype is out there around the cloud. But if you just look at the growth of data in general, it’s insane.

Business Development Executive Cloud Services Provider

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2. Executive vice president and CTO of dinCloud

This cloud provider and Equinix customer said carrier neutrality is a norm, not a differentiator. The source also reported no shortage of data center capacity, largely because of consolidation. Data center capacity surrendered by enterprises is being moved to the cloud, and data centers increasingly offer cloud backup as a service. Reliability and geographic scale are differentiators for data centers, and those offering cloud services are expected to provide some “showmanship.” Pricing for colocation services is likely to be steady for the next two years as consolidation pushes colos to be flexible in price.

Data center market conditions “In the last six months, I’ve seen a lot of colo space that was previously

utilized by enterprise customers … being consumed by cloud providers of various flavors. Clouds sit in a wide array of data centers—some in high-end providers like Equinix, others in their own datacenters, or a mix.”

“Customers want services to work. We’ve been able to double our margins over the last 12 months because of volume agreements, renegotiating contracts and very tight relationships with many of the CEOs.”

“The quality of a datacenter is important to avoid the necessity for failover or to meet regulatory requirements, but as a cloud provider the real test is how quickly can you abandon the site and spin up elsewhere. This is where almost every single cloud provider fails, and dinCloud differentiates itself.”

“There’s a lot of partnering going on. A lot of colos now sell cloud backup. Data centers will partner with three or four of us at a time to provide infrastructure as a service and backup for example. Also, a lot of clouds now have extensive networks tied to dozens of carriers, a menu of carriers.”

“Ecosystems come in many forms. We partner with Equinix, [which] has 98 datacenters under one global contract, so we can provide cloud services locally anywhere in the world that a client requires our services. We partner with many backup software providers who want to sell their product and have cloud storage bundled in for a competitive price.”

“Reliability and geographic scale [are key differentiators]. And cloud is different from other services. There, the showmanship is important. How well is it connected? What is its reputation for uptime? How well does it show when you do client tours? And ancillary services like conference rooms: If you’re doing tours and want to deliver your presentation, then go see the pod you’d live in in our cloud and see the cage.”

Carrier-neutral and carrier-specific capacity trends “[Data center capacity] was getting full, but I’ve seen recently a lot of

companies leaving and the cloud cages expanding. … There have been a lot of mergers across the industry, with telcos buying telcos, cloud providers buying cloud. … For a while we were worried there wouldn’t be enough space, but we’re seeing patches where very large cages are freeing up.”

“They’re moving to the cloud, for sure. There are a lot of different factors. I think it’s one-third about market consolidation, one-third moving to the cloud, and the other third is a myriad of reasons.”

“Too many public clouds are nothing more than colocation virtualized. While cost and convenience have driven customers in, what drives them out is the inability to failover during cloud outages, security concerns, lack of a true Windows and Linux virtual desktop replacement in the cloud required to interact with their virtual infrastructure, and the level of integration/customization they can get with the cloud provider. These are the differentiators dinCloud focuses on most.”

“We have the competitive cost [no transfer fees], high security [dedicated security appliances per customer, with nothing shared], an award-winning desktop that has beat VMware, Citrix and others for years, connectivity via 12-plus carriers, and the ability to failover quickly between any of 98 Equinix locations worldwide.

Carrier-neutral and carrier-specific pricing trends

Customers want services to work. We’ve been able to double our margins over the last 12 months because of volume agreements, renegotiating contracts and very tight relationships with many of the CEOs.

Executive Vice President & CTO dinCloud

Carrier neutrality is the norm [for cloud providers], and customers expect cloud neutrality. They may move servers and desktops to one provider, email to Microsoft and backup to a third. We’re seeing a lot of cloud leveraging.

Executive Vice President & CTO dinCloud

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“I see most people going into Equinix and Alchemy [Communications]. I see a lot of carriers pushing data centers, but for cloud carriers in particular it’s been about going to the data centers with the most connectivity and the most carriers.”

“Carrier neutrality is the norm [for cloud providers], and customers expect cloud neutrality. They may move servers and desktops to one provider, email to Microsoft and backup to a third. We’re seeing a lot of cloud leveraging.”

“[The pricing curve for colo services] depends on what happens with power. We’re seeing more renewable energy and power-efficient equipment from server manufacturers. But prices won’t go down or up for a couple of years. That’s in part because of consolidation, which has made the flexibility of colos a little better. They’re willing to make concessions when moving cages or doing cross connections.”

Future data center trends N/A

3. Vice president of global sales for a cloud computing, managed-hosting service solution

Competition has increased in most markets because more enterprises with in-house data facilities are turning to outsourced storage. Multitiered/hybrid data centers hold strong appeal for those seeking to outsource for the first time. The source’s company and other managed-hosting service providers are experiencing increasing demand from enterprise customers. CyrusOne is a key player in Texas and the Midwest, but Amazon Web Services (AWS) is gaining ground in these markets.

Data center market conditions “The market for managed service providers and network service providers is very strong in our locations in the

Midwest. But many still find it difficult to hand over their operating systems because security is an issue. They may keep control of certain operations in-house but then outsource other functions, working with managed hosting providers like us.”

“Our business is good. No one wanted to deal with outsourcing a few years ago and stayed in-house, but at some point as companies grow it doesn’t make sense. The large enterprise companies are increasingly looking to get out of their corporate data centers. It’s more efficient, faster and cost-effective to work with managed hosting providers.”

“There is far more competition than there used to be. A lot of companies and REITs are building data centers but also sell or lease from colocation facilities. There is a lot of crossover, and more providers, owners and operators are offering managed services and cloud services to meet the growing demand for that.”

“CyrusOne is highly competitive in Midwest markets, and they have services that may give them advantages against facilities that have not diversified.”

Carrier-neutral and carrier-specific capacity trends “There is a lot more interest in multitiered, hybrid facilities. More and more companies are looking for managed

services, and they are doing that in data centers like CyrusOne and in colocation facilities.” “For colocation, we see many more business going to Amazon Web Services versus the stack and rack colocation

facilities. We recently announced our managed AWS service and act as a AWS consulting service and channel reselling partner. I believe the market is leaning more towards AWS these days, at least in our markets. It allows our customers to benefit from the on-demand, pay-as-you-go services from AWS, along with our managed services and support.”

Carrier-neutral and carrier-specific pricing trends “I don’t know about specific pricing in our markets. I know we did a deal with CyrusOne, but I don’t know the details.

In certain markets or at certain connected locations some are willing to pay higher prices because they want or need to be in that location.”

Future data center trends N/A

There is a lot more interest in multitiered, hybrid facilities. More and more companies are looking for managed services, and they are doing that in data centers like CyrusOne and in colocation facilities.

Vice President of Global Sales Cloud Computing Service Solution

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4. Data center customer that offers managed hosting and resells rack space in London

Although new data centers frequently are opening in London, tier 3 and tier 4 data centers with established reputations and a track record for reliability stand out. Prices in London are stabilizing amid growing demands for green and well-staffed data centers.

Data center market conditions “When we look at data center offerings today, we look for connectivity, redundancy, diverse power sources, security,

multiple communication providers. But the real key for us is staff. We’re a reseller of rack space, but we don’t have our own staff at these data centers. We rely on the people at the data centers to respond quickly and know what they’re doing.”

“We needed a data center with a solid reputation and a fairly long history of doing business. We have space with Coreix [Ltd.] and Virtus data centers. Our two data centers are pretty much the same but for different clients. In the event that we need to, we can switch all of our data between them.”

“There are new data centers opening all the time. The market is growing but not overbuilding. We got a better deal on our data center buy two years ago than we would have four years ago.”

Carrier-neutral and carrier-specific capacity trends “We’re only in the market for carrier-neutral environments. They do come

with a premium over carrier-specific, but there’s still plenty of space to be had.”

“I don’t see us shopping for new data center space anytime soon. We just invested in additional capacity and rack space in our current locations and will spend the next two or three years filling it with new clients.”

Carrier-neutral and carrier-specific pricing trends N/A Future data center trends “Our clients are increasingly asking us, ‘How “green” is your data center?’ And my honest answer is ‘not very.’ Data

centers use up a lot of power and cooling, and there’s not much you can do about it. One of our clients has a written corporate policy to source green products as much as possible. I think that will become more common.”

5. IT director for a global investment banking firm; repeat source

Location and facility quality are more important than price in choosing a data center. This source prefers sites outside of major cities like New York and London and has had good success with Cervalis facilities. He looks for carrier-neutral sites but does not believe he should pay a premium for the service. He also does not see an issue with excess capacity, and expects prices to rise in the next few years because of increased power needs.

Data center market conditions “I choose more based on location and quality of site [than price].” “I want carrier-neutral. I did not realize that was an issue. I think paying

more for carrier-neutral is a bad idea.” “Good facilities allow many vendors.” “I was with Verizon prior and they were fine, but Cervalis is really good.” “Cervalis is outstanding. It is new, and I want facilities outside major cities

like New York. Location is a differentiation. I would not use a colo in a city like New York.”

Carrier-neutral and carrier-specific capacity trends “[Capacity levels] depend on the facility. I use Cervalis and they are full in

Stamford [CT] and building another one in Norwalk. I think the good facilities have no problem [in filling space].” Carrier-neutral and carrier-specific pricing trends

We’re only in the market for carrier-neutral environments. They do come with a premium over carrier-specific, but there’s still plenty of space to be had.

Data Center Customer Managed Hosting Provider

London

I want carrier-neutral. I did not realize that was an issue. I think paying more for carrier-neutral is a bad idea.

IT Director Global Investment Banking Firm

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“We are looking at pricing in the UK. I would say that the pricing is better the farther you move away from big cities like London.”

“[Data center] pricing might increase as a result of the cost of power demand increases.” Future data center trends N/A

6. IT director for a $1 billion Mexican retailer

Data center prices are falling because of excess capacity, making data center space somewhat of a commodity. Providers are fighting that trend by partnering with major software vendors so they can offer more complete services. Prices are likely to continue falling during the next few years but eventually will align with the breadth and quality of additional services and start to rise incrementally.

Data center market conditions “For us, it’s a given that the data center has to be agnostic to the carrier. In Mexico, the carrier is a monopoly, so we

need to balance our portfolio. The price is lower—for the same level of service and certifications—for a carrier-agnostic data center. The main issue is the connectivity to their backbone for data interaction. The carrier, at least in Mexico, still has the power over that.”

“The main differentiation [between data center providers] is the valued added by their services. It’s not just about server capacity, storage and network anymore. It’s about business services for their customers; the agility to deploy services in hours, not days, with the elasticity required to support new business processes and specific peaks; and of course, strong processes to administrate and protect their assets.”

“Our first filter [for choosing a data center] is the relationship and portfolio of the data center provider with large software companies and key customers. In our case, KIO Networks and IBM [Corp./IBM] are the main players.”

Carrier-neutral and carrier-specific capacity trends “Absolutely, the large-sized data centers are overbuilding. That is one of the

main reasons for the price drop, the saturation of the market. And new players are entering the game—application management companies, large software companies—that generate partnerships with large data center providers to offer a broader proposal to their customers.”

Carrier-neutral and carrier-specific pricing trends “In the U.S. and Mexico, the price for data center outsourcing only—

infrastructure-as-a-service—is more a commodity. We reviewed several offerings in that sense, and the price is dropping.”

“The business value [for a data center] is more in the service and application management, end-to-end services. In that arena, pricing is driven by the value generated and managed by SLAs [service level agreements]. Even large application vendors like SAP and Oracle are moving in that direction via partners, mostly in Mexico and Latin America. The business now is not just the data center but the valued added of the services.”

Future data center trends “For emerging markets like ours, the data center market is growing by double digits every year, with more aggressive

offerings to sell the unused space.” “Companies now trust a little bit more in [the data center] offering, mainly in the security and privacy domain.” “I expect the price curve will head down for the next two years [because of the excess capacity]. But after that, the

price will be based on the value-added. I forecast an incremental rise in the price due to vendors being more clear on the pricing structure. Right now enterprise customers like us are taking a little advantage of [lower prices].”

Absolutely, the large-sized data centers are overbuilding. That is one of the main reasons for the price drop, the saturation of the market. And new players are entering the game—application management companies, large software companies—that generate partnerships with large data center providers to offer a broader proposal to their customers.

IT Director $1 billion Mexican Retailer

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2) DATA CENTERS Five of these nine executive sources said regional overbuilding of data centers has occurred, while the remaining four said overbuilding was not an issue. Sources also varied in their opinions on pricing trends. Connectivity and carrier neutrality still are important to customers and can command a premium price. Markets with pricing flexibility include Chicago, Northern Virginia, Dallas and Phoenix. Meanwhile, New York City, Northern California and parts of the Pacific Northwest are experiencing pricing pressure. Europe has seen higher prices in its major metro areas, and sources expect further increases in the single digits. Some customers are moving their applications to lower-cost data centers outside of major metro areas. The data center industry is undergoing several changes with providers mixing and matching services in an effort to maintain or grow market share. As they add more efficient technology that takes less space, they also are adding applications that offer better or fuller service their customers. Customers are becoming savvier and contracting for tier 3 services for their mission-critical/global applications and opting for less expensive, even single-carrier solution for other applications. Emerging trends include demand for managed services, hybrid and multitiered solutions, green data centers and Open IX adoption. KEY SILO FINDINGS Data center market conditions

- 5 sources acknowledge some regional overbuilding of data centers. - 4 sources said overbuilding is not an issue. - Data center providers are expanding their technology and services to retain or capture market share. - One source cited industry commoditization because of overcapacity, but said not all capacity is interchangeable.

Carrier-neutral and carrier-specific capacity trends - Carrier neutrality and connectivity remain a competitive edge and can command a higher price. - Carrier-specific data centers are generally older, and telcos that have not added much new capacity may be losing

share to newer data centers. Carrier-neutral and carrier-specific pricing trends

- 2 expect prices to increase, 2 expect prices to decline, 2 see flat pricing and 3 said pricing is regional. - Carrier neutrality and expanded connectivity can still command a premium price.

Future data center trends - Hybrid services demand is growing. - Demand from enterprise IT departments is growing. - Open IX and DCIM are gaining traction.

1. President of an operator of five East Coast data centers

This firm sees an opportunity to charge as much as a 20% premium for newer facilities with extra backup equipment onsite and better power efficiency. The source noted a lot of building in his market but said the space is needed. Single-carrier sites try to maintain higher pricing, but their facilities are getting old and less reliable as the major carriers have not built new space in more than five years. He expects price increases for colocation and multitiered data centers to significantly outpace inflation for the next three years.

Data center market conditions “I would say 75% of the data centers in our area are carrier-neutral. As some of the legacy telecom single-carrier

facilities are getting older and are experiencing more frequent interruptions of power, cooling or connectivity, they are actually losing some market share to newer facilities.”

“They are owned by the largest carriers, and they try to maintain higher rates than newer facilities. I think the newer facilities continue to offer greater value and lower prices.”

“There are some quality differences [among data center providers], but the larger regional players like Xand, Markley [Group Inc.], ColoSpace [Inc.], Digital Realty and CoreSite are all creating new space that is better than the 10- to 15-year-old, non-raised floor space they built originally.”

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Data Centers

“What is interesting is there is less differentiation between the new space. Pricing is more consistent because customers are often seeking prices from all five of the top firms. AT&T [Inc./T], Verizon and other carriers have not created any new space in the past five-plus years.”

“We are seeing [wholesalers move into the retail market] in two ways. One has started selling single cabinets. Others are selling wholesale space to retail providers, and they are cutting it up.”

“The greatest challenges [for wholesalers] is the time it takes to fill up a data center with single-cabinet customers and the added expense to provide them with service. It is why the retail player has been selling to smaller wholesale buyers up to 1,500- to 2,000-square-foot cages for a number of years.”

“Most of the retail data centers in our area are offering both wholesale and retail offerings, and some of the wholesalers are going down market and serving the retail market. I think both sectors are growing.”

Carrier-neutral and carrier-specific capacity trends “The Massachusetts market is continuing to bring more raised floor space

online, but is not overbuilt for the market. Most of the new space is coming online just in time, with additional shell space available to complete as needed.”

Carrier-neutral and carrier-specific pricing trends “Up until recently, we have had standardized pricing across all our data

centers. However, we are just now starting to place additional value on the ‘2N data’ centers [twice the amount of equipment necessary, for redundancy] versus ‘N+1’ [necessary equipment plus one extra] centers as we upgrade all our data centers to ‘2N.’”

“We are also are about to start occupying a new data center with the latest technology and lowest PUE [power usage effectiveness]. As a result, we are now offering a premium data center product at a 20% premium.”

“I expect pricing to increase in both categories [colocation and multitiered] more than the CPI index, with the newer facilities commanding a 10% to 12% premium—starting in January and continuing for at least three years. The newer construction is costing at least 20% more than the last few years.”

Future data center trends “Data center churn for the past year was a little higher than in 2012 as more customers are outsourcing some of

their needs to the cloud. Others are downsizing their space needs by creating their own private clouds in the data centers and refreshing older equipment with new gear that takes up less space.”

“Bandwidth prices continue to drop, resulting in some price reductions for existing customers.” “New logos are continuing to appear as a result of more companies choosing to outsource their data center needs to

more redundant facilities.”

2. VP of leasing for a developer of wholesale data centers in the eastern United States

Wholesale prices are healthy but flat in this source’s markets, including Northern Virginia. However, prices are facing significant downward pressure in places like Dallas and Northern California, where Facebook has put a bunch of inventory on the market. Building has been disciplined for the past several years, so capacity issues are regional. The key selling point for wholesale data centers is total cost of operation, which includes connectivity and power expenses. Retail sites are differentiating based on services and vendors available in their buildings, but that is not a key issue yet on the wholesale side. Many smaller data center operators are going to struggle.

Data center market conditions “Customers on the wholesale side have probably 200-kW-and-higher power requirements; they’re larger or

midmarket enterprises that have a higher IT spend. For those customers, total cost of occupancy [is the key selling point].”

“Cost of occupancy includes, most importantly, connectivity—the types of connectivity and the cost of connectivity for a fiber connection. For the carrier-agnostic sites, at what cost do they sell the services? Connectivity is a very important [selling point].”

I would say 75% of the data centers in our area are carrier-neutral. As some of the legacy telecom single-carrier facilities are getting older and are experiencing more frequent interruptions of power, cooling or connectivity, they are actually losing some market share to newer facilities.

President Operator of Five Data Centers

East Coast

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“No. 2 is the cost of power. That’s becoming a major driver. In New York and New Jersey, a big user that needs 500 kW or 1 MW, it’s 14¢ per kW hour, before you add PUE. You come to Maryland and it’s 7.5¢ or Ohio it’s 6.5¢ or even Georgia at 6¢. That’s a big difference.”

“A retail [data center] is your typical one cabinet or two cabinets for small or medium-sized businesses that have just a couple of racks and are outsourcing for the very first time. On the retail side, that’s a big element [having an ecosystem of platforms and vendors]. Who’s in the data center, and where can you cross-connect? Wholesale, it’s less important because [customers] have their own partners and do not necessarily need that. I do see that slowly evolving [on the wholesale side], but it’s not there yet. Retail drives that more than wholesale drives it.”

“There are some big companies [in the data center industry], but they’re not doing anything innovative. Digital Realty Trust is my biggest competitor. They’re the 800-pound gorilla, but they’re not really doing anything innovative. They’ve left the data center business and are now a landlord.”

“On the wholesale side, I don’t see anyone solving problems in a new way among the big players.” Carrier-neutral and carrier-specific capacity trends “The area where you’re seeing the strongest downward pressure would be a place like Dallas, where it’s a mosh pit,

or in Northern California where you have Facebook putting up 25 MW of resale capacity on the market. They’ve moved away from the colo players to their own data centers, but they have all these long-term leases. The retail players in Northern California are very concerned. Here’s an end user that’s literally dumping inventory and putting enormous pressure on pricing.”

“The opposite of that is Chicago, where you have extremely tight capacity, so demand is in tune with supply and you have pricing at very healthy levels compared to those other markets.”

“In the early years … you had very immature, compulsive and erratic building. But now there’s been a lot of discipline, at least since 2007. In some markets, a lot of the classic commercial real estate landlords jumped in to this market, and there have been some casualties. Dallas is a good example. There is so much inventory that pricing has had a lot of pressure on it.”

Carrier-neutral and carrier-specific pricing trends “We’re seeing pretty consistent pricing where we operate data centers

today. I haven’t seen any price increases, but I’m not seeing any downward pressure where we operate today.”

“We’ve seen some [data center] operators have some financial pressure because of the type of capital they’ve used, and so they’ve had to be extremely aggressive with their pricing. My exposure there would be in the Northern Virginia market, where we’ve seen some downward pressure on deals involving a classic retail player. Because they’re a newer entrant, they’ve had to be aggressive.”

Future data center trends “[Data center providers with] scale are going to have the advantage. A lot of these little companies trying to jump in

the business are not going to have the scale to drive the density and deliver basic service. The small guys, if they don’t sell now or consolidate, will have a lot of difficulties.”

“The larger companies with access to capital are going to have advantages. The equipment—the actual servers, the boxes—that the managed hosters, IaaS [infrastructure-as-a-service] and cloud providers are buying—is becoming incredibly expensive.”

“For the data center [providers], the key issues are going to be the cost of acquisition, your operating costs and scale. Just building a new center is not going to guarantee success. If you put together a data center and try to cut corners and hire these young kids to man your servers, you’re going to have problems. A lot of people do that, and they have major outages. There’s going to be a flight to quality.”

“What we’re doing is unique. We’re not building anything; we’re refreshing what’s there from big users. All these big enterprises overbuilt, big companies like Citibank or Wells Fargo. These boxes, five or 10 years ago, did a fraction of what they do today. That means they don’t need as much space in the building, but the power to drive it is going to be a lot more.”

In the early years … you had very immature, compulsive and erratic building. But now there’s been a lot of discipline, at least since 2007. In some markets, a lot of the classic commercial real estate landlords jumped in to this market, and there have been some casualties. Dallas is a good example. There is so much inventory that pricing has had a lot of pressure on it.

VP of Leasing Developer of Wholesale Data Centers

Eastern United States

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“These companies built these big data centers but now only need 10% or 20% of that space, but they have to operate all the coolers and everything in this cavernous building. We’re coming in, buying these high-quality, overbuilt assets for a fraction of what they’re worth and repurposing them as wholesale data centers.”

3. Senior director of investor relations for a global data center service provider

Space and power are somewhat commoditized, but data centers continue to distinguish themselves in connectivity, power density and location. Colos still are able to charge premiums for carrier neutrality, but this company bases those premiums on reducing latency in transit versus simply offering carrier neutrality. Hybrid services are in especially high demand. Wholesale’s challenge to retail is at the upper end of the market in terms of space sold or rented.

Data center market conditions “At the end of the day you’re selling space and power, which themselves are somewhat of a commodity. The

difference is certainly the type of connectivity, the type of power, power density in a facility as well as the location. Those are all variables that differentiate one data center from the next.”

“I believe they’re able to charge premiums. If everyone has carrier neutrality, then there’s no premium. But relative to a standalone telco, there will be some sort of premium.”

“We take a different approach to this: We have an IP transit business and bundle those services with our data center services. There is a premium for the technology we offer around a solution through multiple providers to that reduces the latency of providing that transit. There is a healthy premium we’re able to pass on, which we wouldn’t be able to do if wasn’t a carrier-neutral site. The value add is not necessarily the multiple carriers but the patented technologies we layer on top.”

“Enterprises are looking for a hybrid solution to their infrastructure needs, and more and more often that solution is coming in form of multiple data center services across colocation hosting and cloud.”

“Web-scale applications come to mind [as moving to hybrid], and applications with a high variability of demand. An example would be online gaming. For a legacy game there might be a known quantity of users, but as a company launches a new game they don’t know the demand, and they’ll put that in a cloud environment where they can spin up or down servers based on demand.”

“[Ecosystems are] becoming more and more critical; it’s how data centers differentiate themselves beyond commoditized power and space. I would say [offerings include] the ability to offer additional services beyond just colocation.”

“[Competition is] very localized. Equinix is clearly the 800-pound gorilla, but beyond them it largely depends on geography. We have data centers in eight North American markets, and each has very local competitors that are in either just one or a couple of those markets, with the exception being Equinix.”

Carrier-neutral and carrier-specific capacity trends “[Capacity] varies significantly by region and by the type of data center. Clearly there’s been a lot of talk about

overcapacity in certain markets, and I think a lot of the supply that’s come online has been largely in the wholesale market versus retail colo.”

“Most of the increased supply has come on the wholesale versus the retail colo side. I believe in retail that demand still outstrips supply.”

“The wholesale guys are competing on a complete commoditized product, and there is somewhat of a blur between wholesale and retail colo and they’re moving down market to the retail colo. They’re competitive at what I would define as the upper end of the retail colo market, in terms of amount of space sold or rented.”

Carrier-neutral and carrier-specific pricing trends ”Our expectations are for pricing to remain stable and for us to continue to have success passing on our annual

inflation price escalators that are built into each of our contracts. We don’t see that changing.” “There’s different pricing dynamics across services. There’s stable to slightly increasing pricing for retail colo. Then

for hybrid, hosting and cloud, I’d expect pricing to come down somewhat over next several years. But the reduction in

I believe they’re able to charge premiums. If everyone has carrier neutrality, then there’s no premium. But relative to a standalone telco, there will be some sort of premium.

Senior Director of Investor Relations Global Data Center Service Provider

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pricing has been—and I would expect to continue to be—more than offset by the reduction in cost for hosting and cloud servers. And that’s the primary catalyst for price declines in hybrid services for hosting and cloud.”

Future data center trends “The biggest trend is the move toward hybrid solutions.” “It’s too early to call [regarding Open IX’s influence], but the impact on data center providers is likely to vary

significantly across companies and business models. Clearly the data centers that are generating a disproportionate percentage of revenues from interconnection and transit are likely to be at the highest risk.”

4. CEO of Pacific Northwest carrier-neutral colocation centers

Overbuilding is regional. Some of the West is overbuilt, which drives down pricing, but that situation is temporary. Carrier neutrality is no differentiator. However, hybrid services (colocation alongside managed services and cloud) and a strong ecosystem of partners (particularly AWS) are important features. Density is a differentiator as well, which challenges older Internet colos versus more modern switch colos with up to 10 times the density. SMBs tend to buy based on locality and vertical versus tier level, while enterprise favors tier 3 or 4. All colocation providers must be prepared to connect to and leverage the success of AWS.

Data center market conditions “There is overbuilding in the market. I don’t think it commoditizes the industry, just that there’s a period of time when

oversupply will drive prices down. But once demand picks back up, prices will go up. It’s more of a supply/demand curve, which changes. And it’s a market-by-market issue; colocation still for some part is regional-based.”

“Portland [OR] is a little overbuilt, Seattle is overbuilt, Las Vegas is underbuilt with only one significant provider. Denver is underbuilt today, but ViaWest is building a facility.”

“Everybody I know of in the business has multiple carriers and is offering some type of carrier neutrality. It’s a cross-connect game and you’re seeing price pressure on cross-connects.”

“Hybrid would include both colocation and managed services or cloud. Are those more in favor than straight-up colocation requirements? I would say yes. In the tier 2 data center market, folks with broader offerings tend to do better, so hybrid is valued more than strict colo.”

“[Ecosystems are] very important. Do you need to have services available in your data centers even if you do not provide them directly? Yes, you do.”

“Everybody’s interested in [AWS’] Direct Connect. In cloud there’s one predominant player, being Amazon, and everyone else is a stepchild.”

“SMBs will buy based on locality of some kind or vertical of some kind. … Go back and look at how hard it’s been for folks like HP, Best Buy and others to break into SMB markets. It’s difficult because the channel to that market is typically some local VAR doing some systems integration work for that customer.”

“Tiering is a differentiator, particularly in enterprise which wants tier 3 or 4. Density, how much you can actually provide, is a particular difference between older and newer data centers. An old Internet data center versus a new switch DC is going to have vastly different ability to support density, on the order of 2 kW per rack where switch can offer 20 kW. The amount of carrier neutrality you have is important. You need only the one your potential customer is looking for, but to get to that point you need several. The number of providers is important.”

Carrier-neutral and carrier-specific capacity trends “[Wholesale is] challenged with [moving into retail]; it’s not a natural act for them. They’re definitely competitive, but

are they competent? A good example is Sabey, one of the largest wholesale providers in the U.S., which is having a hard time selling its downtown New York data center, so it’s gone to a retail model. Their intellectual property and tribal knowledge are built on wholesale, not retail, and they’re trying to figure out how to be a real provider.”

Carrier-neutral and carrier-specific pricing trends

There is overbuilding in the market. I don’t think it commoditizes the industry, just that there’s a period of time when oversupply will drive prices down. But once demand picks back up, prices will go up. It’s more of a supply/demand curve, which changes. And it’s a market-by-market issue; colocation still for some part is regional-based.

CEO, Carrier-neutral Colocation Centers Pacific Northwest

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“Hybrid will maintain its market because it’s a value-add associated with having both the cloud service and managed service and colocation. As for carrier neutrality, I don’t believe there’s a lot there that’ll continue to be material.”

Future data center trends “How we connect with Amazon and how it continues to fare in remaining the 10,000-pound gorilla are important.

They’re bigger than the 800-pound gorilla.”

5. Sales and marketing director for a Pacific Northwest colocation and cloud provider

Some commoditization has happened as the infrastructure ages. However, data centers are not interchangeable and still differentiate themselves based on, among other things, geography, full-service and managed-service models, and efficiency. Carrier-neutral centers are not securing premium pricing; rather, the name recognition of AT&T or Verizon allows non-neutral facilities to charge higher sticker prices. Vendor ecosystems are not a strong differentiator.

Data center market conditions “I would say in the U.S. it’s a proximity-based type of search. We see there being a large demand for a tier 3 data

infrastructure, with a little more resiliency and a full-service model.” “There’s commoditization in general. There’s a lot of inventory out there, but it’s not interchangeable. There’s still a

lot of differentiation and a distinct nature to any one of them. Geography is a differentiator. Fiber optic networks are not all the same. Your power cooling and network systems can differentiate you relative to the competition. People in the Northwest value or appreciate efficiency, and for that reason we’ve adopted a greener type of data center.”

“Still, all things being equal, there’s some truth to [commoditization] as the infrastructure becomes longer in the tooth and people don’t have to pay for new stuff.”

“I see [carrier neutrality] being the opposite. I look at a Verizon or AT&T data center, and they tend to have a higher sticker price. It has to do with name-brand recognition.”

“I don’t see hybrid taking off. People are adopting one of two strategies: colocation or cloud. We have one. Equinix has one, but it’s still early in the development process.”

“What’s holding hybrid back is maturity in the market. One of the reasons I don’t see a high adoption rate is that hybrid looks good from the financing end, but there’s a different set of challenges for the CIO or CTO who’s driving that process. You have the wrong two groups coming together to make hybrid work.”

“[Vendor ecosystems] can be cool. Telx has an ecosystem they tout, but at the end of the day it’s an add-on. … People shop colo based on specific needs, and there’s a lot of places to go outside of any one vendor ecosystem.”

“The key differentiators in my mind are service and infrastructure. We’re all differentiating along those lines. We’re full-service, and down the street from us is a Level 3 with no service.”

Carrier-neutral and carrier-specific pricing trends “The Seattle market has a lot of competition. I see a lot of price elasticity among the small guys who’ll drop their

price points to do whatever it takes to get customers in.” “We’re carrier-neutral but also offer a BGP [border gateway protocol] blend. The pricing’s falling by the price of

bandwidth, which is always getting cheaper. But I see the potential for carrier-neutral data centers that were more hands-off, provide just power and cooling; some of them are jumping into the managed server route. On the network side they’re providing bandwidth themselves; they might have Verizon and AT&T or might provide the bandwidth solutions themselves.”

Future data center trends “Managed services is becoming important again. I see the private cloud as being something that’s going to mature. I

believe it’s just platform as a service, really, just the rebranding of services to include hardware and things more in the wheelhouse of IT departments.”

Still, all things being equal, there’s some truth to [commoditization] as the infrastructure becomes longer in the tooth and people don’t have to pay for new stuff.

Sales & Marketing Director Colocation & Cloud Provider

Pacific Northwest

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6. Managing partner for a data center realty company that owns, sells, builds and brokers services

Data center and colocation prices vary by geographical location and can be as high as $1,200 per rack in tight markets and as low as $700 per rack in less competitive markets. Chicago, Dallas/Fort Worth and Northern Virginia are hot markets while the New York coastal region has seen some migration because of Superstorm Sandy. Data center REITs and retail colocation continue to grow, but hybrid data center facilities are filling a need for enterprise corporations with active in-house capacity but no services and space. The source named Equinix, Digital Realty Trust, Amazon Web Services and Rackspace (RAX) as growth leaders in his base of North Carolina, in addition to other high-demand Eastern markets. The REIT sector has tightened with the recent IPO of QTS Realty Trust Inc. (QTS) and could become more competitive if the IRS approves Equinix’s and Iron Mountain Inc.’s (IRM) recent requests for REIT status.

Data center market conditions “We have a very competitive market now. Equinix is very competitive in our base region in the commercial

environment. … Their revenue wasn’t as good in recent reporting although they upped their guidance. Rackspace is very big and growing. AWS is big and spending huge amounts of money to buy property to then build their own data centers. They also lease space from the bigger guys like Equinix and Digital Realty Trust. AWS competes with them but also leases from them.”

“Retail colocation is big in the major metropolitan areas. These are generally professional operators that are carrier-neutral like Equinix. Digital Realty is mostly a wholesaler, and then there are the IT infrastructure, network and managed service providers like Peak 10, Windstream [Holdings Inc./WIN] and [Verizon’s] Terremark. But Peak 10 and Windstream also offer the ability to augment. Things are blending together at this point, and you see growth in all areas. Those who used to be landlords are now offering more services, and those who were outsourcing now manage the services as well. But some still just want colocation. They just want to do stuff on their own.”

“The REIT side is competitive and may get more competitive. Iron Mountain and Equinix are trying to convert to REITs, and the IRS has it under review. That could give them a market boost. The benefit of REIT status is that it offers a tax benefit to shareholders.”

“There is a lot of intermingling. Equinix does not just own data centers; they also offer services. Digital Realty is thought of as wholesaler, but they also do colocation, even though they once said they would never get into it. Equinix, Rackspace and AWS have adjusted their business models to accommodate the demand for and appeal of hybrid. Hybrid has seen growth.”

“The hybrids are used a lot because corporations are already sitting on their own data centers and are looking to augment, which they can now do with Equinix and Digital Realty.”

“It used to be you would do one thing or the other: You would outsource everything or keep everything in-house. Now you can do both. Rackspace made the decision to offer augmentation while allowing you to keep your in-house operations. It has driven their growth. Typically these were overwhelming decisions for corporations. They struggled with doing one thing or the other. It created paralysis.”

“There are a lot more choices, but availability is geographical. Hot locations include Chicago and Dallas/Fort Worth. Northern Virginia has been growing like crazy. New York is still growing, but the growth is slower because of Hurricane Sandy. Exposure to disaster is now an issue making riskier areas more of a problem.”

Carrier-neutral and carrier-specific capacity trends “Demand for data center space is growing as fast as they are building facilities. The issue of overbuilding seems to

come up from time to time, especially after someone announces another 400,000-square-foot facility in an area that still has availability. But every time in the last few years there have been reports of overbuilding, it’s been proven wrong. Sure, there may always be overbuilding in some markets, but the availabilities don’t seem to last.”

“Carrier-neutral is in demand, and even the colocation companies are selling themselves as carrier-neutral. Someone like Verizon’s Terremark claims to be carrier-neutral, and they may have numerous carriers in their space. But I don’t see how they are carrier-neutral because they might offer numerous carriers but provide their own at a

There is a lot of intermingling. Equinix does not just own data centers; they also offer services. Digital Realty is thought of as wholesaler, but they also do colocation, even though they once said they would never get into it. Equinix, Rackspace and AWS have adjusted their business models to accommodate the demand for and appeal of hybrid. Hybrid has seen growth.

Managing Partner Data Center Realty Company

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lower rate. If Verizon is one of the first people you deal with in leasing a rack or cage and then you decide to buy bandwidths, I would imagine you might offer more competitive pricing than others.”

“There is more of a willingness by corporations to outsource. At one time they were only interested in owning their data centers and keeping them in-house. But as companies grow, they realize it’s not cost-effective to stay in-house. They were sitting on inefficient, expensive, increasingly complex data centers and are now more comfortable outsourcing.”

Carrier-neutral and carrier-specific pricing trends “Pricing is hard to predict. Northern Virginia is hot now and tight for space, but one big vacancy could unsettle that

market and cause the prices to go down. The pricing, capacity and competition issues boil down to geography, and every market differs.

“Prices vary by market. In a tight market prices might be around $1,200 per rack, and in markets that have availability prices are around $700 per rack.”

“The margins are better for the managed service providers than for the colocation providers, which is more of a commodity and just leasing out the space.”

Future data center trends “Another thing is happening because of all the miniaturization in servers. People are using less space because they

can put more servers into smaller areas. We now hear some of the corporations saying to us, ‘If we have 100,000 square feet and only use half because we’ve updated with equipment that’s smaller, we might put out the available space for lease.’ … It’s not a real threat now, but over time it could cause some pressure on providers in certain markets and increase competition.

“California has lost some data center customers to Texas because the cost of power is high. New York has been going through some vacancy issues because some people are migrating out after all the trouble with Hurricane Sandy. People worry about a hurricane or other disaster happening again. And people are willing and able to relocate because there’s more latency in more regions.”

7. Executive and portfolio manager with a global provider of data center solutions

Pricing has started to stabilize in certain markets this year. This follows 2012’s pricing pressures when most key markets witnessed a 10% drop. Pricing now will depend on construction costs, which have fallen. Commoditization has not yet occurred, and many enterprise companies still require customization, favoring no one architecture or design. Overcapacity and overbuilding issues are overblown. Server efficiency and size require less space, but the leftover capacity leads to implementation of new applications or added power. Northern Virginia and Dallas are hot growth markets with a national cache and lure. The source supports the Open IX movement, which continues to gain ground. REITs will benefit from Open IX while providers like Equinix stand to lose. Other trends include connectivity, DCIM and establishing a global presence.

Data center market conditions “I don’t think data centers have developed into a commodity yet.

Companies are not settling in to a particular architecture. In fact, we find customization to be important, and having the ability to address needs on a data center by data center basis is important. Commoditization may come at some point, but we believe it is the smaller players who don’t have the staff or capacity to customize who are talking about commoditization. A lot of people have tried to commoditize the industry, but it has not happened yet. Many are hoping it does become commoditized. If it does, we are well positioned because we have enough capacity to allow for it. But we also are well positioned if commoditization does not occur.”

“Data centers have to be carrier-neutral at this point. Connectivity is more important for developing an ecosystem of services. You want the ability to take advantage of reaching other data centers and the customers’ presence in other data centers anywhere. We are connecting our global platform to do that. The ecosystem relies on a combination of more fiber from the telecoms and connectivity. We have been putting down fiber and partnering with more telecoms to provide connectivity. Our effort to put down fiber is a relatively

I don’t think data centers have developed into a commodity yet. … Commoditization may come at some point, but we believe it is the smaller players who don’t have the staff or capacity to customize who are talking about commoditization.

Executive & Portfolio Manager Global Data Center Solutions Provider

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recent phenomenon. We prefer to partner with [a telecom] to do it, but if that’s not available, we do it ourselves. We think it gives us a nice, competitive advantage.”

“Competition differs by market. We are the leader in custom and carrier-neutral solutions, and in some cases we compete with colocation providers. Equinix is considered the leader nationally in colocations solutions. MSP [managed service provider] solutions are a subset of colocation, and [CenturyLink Inc.’s/CTL] Savvis is considered the national leader in the segment.”

“What has changed in the competitive scene is that there are more competitors, including those who have gone public like QTS. QTS, like CyrusOne, is regional and does colocation and managed services. I wouldn’t say that CyrusOne is growing rapidly. They have announced a 100,000-square-foot campus, and the announcements give the perception that they are growing fast. There is a difference between what is announced and what is built.”

Carrier-neutral and carrier-specific capacity trends “I do not think there is overcapacity. It may be that as servers become more efficient and contained that we see

some existing space freeing up. But we see that there is then room for numerous additional applications. Rather than server efficiency creating oversupply, it in fact is creating demand and need for even more expansion. We went through the same thing with blade servers; people thought it would result in 75% overbuilding. Also, the cloud is discussed as a source of overcapacity. But in reality it means you have more applications in reach. We find that innovation causes big growth spurts. Maybe someday that will change but not now.”

“The issue of overbuilding, in reality, is overblown. The growth impacts the marginal players more than us. People may say Silicon Valley and Northern Virginia are overbuilt, but we have no existing inventory in Northern Virginia at this time and we are preleasing in that market and building out. We have very little inventory in Silicon Valley. We do not see overbuilding or excess inventory. If you are new to the data center market, it may seem that way.”

“There is a sentiment about overbuilding. … But when you talk about overbuilding, you have to look at announcements about what may be built and contrast it to what actually is being built.”

“One trend we have noticed is that increasingly people want to see that you have a global footprint to handle a company’s entire global operation. They want to know you can operate 24/7 in any time zone.”

Carrier-neutral and carrier-specific pricing trends “In 2013, we have seen either an uptick or flat pricing in certain markets. … Throughout 2012 we did see some

pricing declines of roughly 10%. In some markets it was more, and in some markets pricing did not change at all.” “Inventory and competition always affect pricing. For us, we are still getting in on new construction, and our return on

investment has not changed at 12% to 14%.” “We are seeing more efficiency in design, and construction prices are coming down. Prices are lower than they used

to be, but we believe it is because the costs of construction are lower. When we had less competition and the cost of construction was higher, we still had a return on investment of 10% to 14%. This is still a very good market for investors.”

Future data center trends “The industry has created a lot of efficiencies in the last five years. Pricing may now turn on construction costs. If

construction costs creep up again, the data center pricing will follow. If not, we expect pricing to stabilize.” “Having a global footprint is increasingly important. Connectivity is more and more important. Integration of the

public cloud and private cloud offerings and company IT usage is important.” “We are aware of the Open IX movement, and it is gaining traction. Most data center operators will do well with it,

and there are some companies that will not. If you are a big colocation provider or predominantly an Internet exchange, it will not be good for you. If you are an REIT, if you are Digital Realty Trust, you will do well. Open IX is gaining traction because most people don’t like monopolies. The carriers certainly prefer an open environment and competitive pricing. There is one company in particular [Equinix] that is not wild about it and probably won’t do well.”

“The big news for 2013 in this industry is the Open IX movement, connectivity and DCIM. This gives us a huge competitive advantage. The Digital Realty Ecosystem has added the Digital Open Internet Exchange initiative.”

“There is no one technology to fit all situations. You have to match the cooling system to the climate.”

8. Operator of one of Europe’s larger tier 3 data centers

Service, staff and infrastructure differentiate data centers, making them far more than just space and power commodities. Still, data centers face the threat of government regulation unless a standardizing body can step up to

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create universal value. This source attended the Nov. 20 Datacenter Dynamics conference in London and was involved in a panel discussion called “Are data centers a commodity—why your DC provider matters.”

Data center market conditions “Everyone who attended the panel presentation agreed that data centers

are not a commodity. Data center margins are still very good.” “The thing that surprised me at the panel discussion was about tier ratings.

Everyone agreed that tier 3 was now a standard of data centers, but some mentioned the trend of networking several tier 1 centers together to achieve the same resilience as a tier 3 data center. But I don’t know if that’s really happening.”

“The data center market is a bit more competitive than it’s been in past years. It’s very tough for new players to come in because it take quite an investment to get off the ground. Existing players are getting very aggressive.”

“We’re based outside of London so we’re not seeing as much price pressure as in the city, where’s there’s big price competition.”

“More business has definitely moved outside of London in the last 10 years, mostly due to lower prices. Real estate and power are just too expensive in London; our customers don’t mind the drive out here.”

Carrier-neutral and carrier-specific capacity trends “Carrier-neutral is critical to businesses today, but you don’t have to have hundreds of carriers like TeleCity offers. In

my view, you only need three good choices. We offer eight.” Carrier-neutral and carrier-specific pricing trends N/A Future data center trends “Anything around energy is going to be important.”

9. European data network carrier that also operates 20 carrier-neutral data centers

Competition is keeping data center prices to only single-digit increases in four major European metro areas, but other European cities and Asia are underserved and have strong growth potential. Prices still are tied to the number of carriers offered at a site, but customers are economizing by dividing their applications among data centers and having noncritical applications at cheaper sites.

Data center market conditions “The question of overbuilding varies by city. Location is still a critical factor

for data centers. Some of the bigger metros are possibly oversupplied, but we believe it’s a temporary thing. It’s a one- or two-year issue at most.”

“Paris today is very difficult market to maintain prices in. Prices are at almost uneconomic rates in Paris. Amsterdam has seen prices slip to a lesser degree. There’s a lot of building in Amsterdam, and its colocation market is very strong. Frankfurt isn’t a good market to get good pricing on because [all major data center providers are] there and the customers are sophisticated. London is a very buoyant market, stable prices, a lot of building going on. Money is still being made in these four major markets, but revenues will go up by single digits.”

“Some of the lesser markets—Zurich, Milan and Dublin—are not anywhere close to being mature. There’s latent demand in these markets, and high growth rates are forecast. There are plenty of pockets where demand is underserved at the moment.”

“Asia will also be a high double-digit growth market for data centers. There’s some price pressure beginning to happen in Hong Kong and less so in Tokyo; these are high-growth markets.”

Carrier-neutral is critical to businesses today, but you don’t have to have hundreds of carriers like TeleCity offers. In my view, you only need three good choices. We offer eight.

Operator Europe’s Larger Tier 3 data Centers

The question of overbuilding varies by city. Location is still a critical factor for data centers. Some of the bigger metros are possibly oversupplied, but we believe it’s a temporary thing. It’s a one- or two-year issue at most.

Data Network Carrier, Europe

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Data Centers

“It’s not so much a matter of commoditization in the data center market, but customers have a clearer view of what they want and what the suppliers can deliver. Today it’s more of a knowledge transaction and not just a trust transaction.”

“Three years ago we took a look at the booming data center market in Europe and the returns of the public data center companies and thought, ‘We have the same assets; we want a piece of that action.’ … We see growth in this market.”

“The real money is in the tier 3 data centers. There have been tier 4 data centers built, but no one can afford to run them. … Tier 2 is good for cloud computing and applications that don’t need the resilience of a tier 3. No one will build less than a tier 3 data center because today’s applications require the tier 3 resilience.”

“Customers know more about data centers and know more about what they’re buying. The industry has certifications, auditors and data center standards to some degree.”

Carrier-neutral and carrier-specific capacity trends “When the carrier-natural data centers come to Europe, they were the models. We’re a carrier, and we only build

carrier-neutral centers. Our customers want another carrier in addition to us for risk management; it’s standard business practice.”

“There’s more sophistication about which data centers customers choose based on which application they want to run there. Banks, for example, want a robust center, but it’s not important that they have 50 carriers. On the other hand if you’re a gaming provider and doing online gaming, you may want to have 70 or 100 carriers.”

Carrier-neutral and carrier-specific pricing trends “The more carriers, the more expensive a data center, and customers are realizing that they don’t need to have all

their applications in one space. Customers are looking at dividing their applications among different data centers to economize. They can save money by having their accounting and payment applications in a carrier-specific data center and their online services in a carrier-neutral center. It’s quite doable for a customer to have their front end at a TeleCity site but their payment system at [another] site.”

Future data center trends “Modularity is a big trend. It affects the way data centers are built so it will take some time to trickle down but every

center will be modular. You can scale very quickly, and you only build what you need.” “Green will continue to be a strong theme because there’s not only the regulatory side—where you have to comply

with pollution laws in your area—there’s also the customer side where you need to comply with customers corporate mandates for doing green business.”

“Ninety percent of the green debate is about the cost of power and helping customers understand cost.” “Another trend is how customers buy data center space. About five years ago there were two types of customers:

those that would take out a long lease on a lot of space and a lot of power, and those that would buy rack by rack. Now we’re seeing a merging of those two types. Customers want to make a commitment, but they make it clear what they want, cages or suites, and for a determined amount of time.”

3) CARRIERS Overbuilding of data centers is not a problem, according to three of these four sources. (The fourth source did not comment.) Carrier neutrality is now the norm rather than an advantage, and key pricing differentiators are advanced services such as cloud offerings and high-quality staff. REITs offering lower-density colocation services are expected to struggle. Two sources said prices have fallen 2% to 10% while another said prices are firm and likely will increase 3% to 5% per year because of annual contract escalation clauses. Demand for data services, particularly multitiered hybrid solutions, is growing as large enterprises look to outsource IT applications. Leaders include Equinix, CoreSite, CyrusOne, Digital Realty Trust, Windstream, CenturyLink’s Savvis, Verizon’s Terremark, AWS and Data Foundry. KEY SILO FINDINGS Data center market conditions

- 3 sources do not see overbuilding as an issue for the data center industry. 1 did not comment. - 1 source said overbuilding was an issue during the economic slowdown but that centers now are filling up. - Carrier neutrality now is the standard and not a premium price driver.

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- The data center market is demanding advanced services, including cloud offerings and high-quality staff. Carrier-neutral and carrier-specific capacity trends

- Capacity is not an issue. 1 source pegged availability between 10% to 25% at major data centers. Carrier-neutral and carrier-specific pricing trends

- 2 sources expect pricing to decline 2% to 10% due to competition. However, some of the decline will be offset by demand for additional services.

- 1 source said 3% to 5% escalation clauses are common in contracts and are needed to offset power price hikes. Future data center trends

- Demand for water is increasing as data center incorporate water-cooling technology. - Providing an ecosystem of vendors and services is an emerging trend. Smaller REITs are expected to have difficulty

meeting this demand. - Large enterprises are slowly moving applications to data centers as they become more confident in security.

1. Carrier cloud service provider for multinational companies

The world’s largest corporations still are just sticking their toes into off-site data centers and doing so only with third-party applications from the likes of Salesforce.com Inc. (CRM) and Google Inc. (GOOG). Their legacy computing applications remain at on-site data centers, but other applications are being moved into carrier-specific, off-site centers.

Data center market conditions “Large companies are making the transition to the cloud slowly. When they buy programs like Salesforce or Google

Apps or Amazon Cloud, they will typically run these applications at our data centers, not their internal data centers.”

“We work with the world’s largest multinationals, not small companies, and our customers work only with our data centers, not colocation providers.”

“Very sensitive applications or information is kept at companies’ own data centers along with their legacy systems.”

“I don’t see large multinationals using colocation providers.” Carrier-neutral and carrier-specific capacity trends “The reason large companies want a carrier-specific data center is for

security and accountability. Carrier-neutral centers are riskier from a security standpoint.”

Carrier-neutral and carrier-specific pricing trends N/A Future data center trends “Large corporations will slowly be moving more applications to data centers as long as the security can be assured.”

2. Chief marketing executive for a national communications services provider

Data center prices are falling as much as 10% in regions with plenty of supply, but are rising as much as 10% where space is tight. This source expects a slight pricing decline during the next few years. Overbuilding is a problem in only a few markets, though he cited too much low-density space overall. Carrier neutrality is the norm rather than a key differentiator, so data centers are competing based on in-demand advanced services such as multicloud connectivity. Equinix, CoreSite, Digital Realty Trust, Windstream, Savvis and Terremark are the leading data center providers.

Data center market conditions “Carrier neutral is the norm, so very few [data centers] are not carrier-neutral, except carriers like

CenturyLink/Savvis, Windstream, Level 3. Carriers get by by dropping prices on network connectivity.” “Multitiered [data centers] are growing because customers want cloud and other more advanced services as they

grow from basic colocation services. Multicloud is growing also, so the ability to interconnect with multiple partners is increasing in importance.”

Carrier-neutral and carrier-specific capacity trends

The reason large companies want a carrier-specific data center is for security and accountability. Carrier-neutral centers are riskier from a security standpoint.

Carrier Cloud Service Provider Multinational Companies

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“The issue of overbuilding is slight. Very few markets are overbuilt. More often there are capacity constraints.” “There is an overabundance of low-density space—50 to 80 watts per square foot. There is a good balance of

average and high density space, maybe some constraint on the high end.” Carrier-neutral and carrier-specific pricing trends “Generally, prices for [data center] space are declining 2% to 10% per year

where there is excess capacity. Prices are flat where markets are in balance, and increasing 2% to 10% where space is scarce.”

“Power prices are holding steady.” “[I expect] a slight decline in pricing over next few years—2% to 5% per year.

If [the deals] include network and applications like SIP [session initiation protocol], storage, compute, HPBX [hosted private branch exchange phone system] as part of bundle, [buyers] will see larger discounts, 5% to 15%.”

Future data center trends “Location is becoming less important. Size, infrastructure and breadth of

applications are the key differentiators.” “It’s very critical [for a data center to offer a platform/ecosystem of vendors] and becoming increasingly important.

REITs will have difficulty with the breadth required unless they are very large.”

3. Vice president and general manager of a national communications service provider

Overbuilding of data center space is a nonissue, but prices are dropping about 10% a year in key markets because of heightened competition. Carrier neutrality is the norm. Data centers now must offer access to MSPs and NSPs (network service providers). The industry’s sustainability and expansion will be driven by access to electrical power and water, rather than physical capacity, as well as the avoidance of disaster-prone locations. Customers are increasingly interested in data centers with a global footprint to support 24/7 operations and cloud connectivity. The source said Texas is one of several hot markets. Digital Realty Trust, CyrusOne and Data Foundry continue to expand in the state.

Data center market conditions “Data center demand is high in our city and in cities around the state and around the country. Demand and growth

varies by city. Metropolitan centers typically have specific areas that were built or established specifically to create an environment that would attract data center operators. Many are near airports and clustered.”

“I do not see overbuilding in our region. Whatever building or expansion exists is merited to accommodate growth in the future. There was some overbuilding a year of more ago, but I do not believe there is overbuilding now. The demand is so great, and more and more enterprise companies are outsourcing. The [data centers] cannot build fast enough.”

“[This] is a particularly desirable area. We see rapid [data center] growth. It’s because we have few disaster issues. Good support systems for water power are available. We have a strong high-tech community seeking data center space.”

“It is very important for data centers to offer a platform of vendors, especially as companies move out of their in-house legacy data centers and move into one DC but they still want to diversify.”

“All of the big DCs offer a number of carriers. You will find that most of the big players have 10 to 12 different carriers. Even the smaller DCs have at least three carriers.”

“The multitiered hybrid data center is growing faster than the retail colocation facility. It used to be that companies had an in-house DC and looked outside just for backup. Now you have companies putting their entire set of serves in the DC and that means the DCs need to offer a full portfolio of products.”

“I see very little differentiation between DCs. … They all have cool esthetics … power, flexibility. They all look and smell alike. If there is a differentiator,

The issue of overbuilding is slight. Very few markets are overbuilt. More often there are capacity constraints.

Chief Marketing Executive National Communications Services

Provider

I do not see overbuilding in our region. Whatever building or expansion exists is merited to accommodate growth in the future. There was some overbuilding a year of more ago, but I do not believe there is overbuilding now. The demand is so great, and more and more enterprise companies are outsourcing. The [data centers] cannot build fast enough.

VP & General Manager National Communications Service

Provider

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it may be the offering of hands-on, 24-hour service.” Carrier-neutral and carrier-specific capacity trends “Power [versus capacity] is the No. 1 requirement for DC viability. If you can’t get enough power, you are screwed.

DCs need to know in advance and work with the power utilities to make sure the grid available to them has enough power capacity for their current and projected needs. Increasingly, it’s becoming crucial to site a DC in a location that has access to two power grids. … I recently asked CyrusOne about their power costs. They spend half a million dollars a month to keep their facility powered. Power can make or break a DC or a city that is trying to attract or keep DC.”

“More cloud providers are entering the DC space. The most notable is AWS. We see a lot of enterprise organizations putting a presence in environments that have a variety of platforms. Amazon may or may not have a DC of their own in an area. For certain applications they are better off outsourcing. … They are not carrier-neutral like SunGard [Data Systems Inc.]. They sell everything to the customer from soup to nuts. Rackspace is growing rapidly, and they may offer the cloud through AWS. The thing about Rackspace is that they are maniacal about completely controlling everything that goes on in the centers to the point of not allowing customers access to the space.”

“The wholesalers moving to retail are competitive. As competition increases, it does come down to services and access. If you have your whole business wrapped up in a specific DC, you want the best deal, but if it comes down to a service you need and paying a little extra, you pay extra.”

“We do see some of the bigger REITs like Digital Realty Trust increasing their reach. They have been going in and buying up buildings that other DCs use. They bought the building that SunGard resides in. They buy up the buildings that the third-party DCs reside in and then they lease back to them.”

“In our region, the leading DCs are CyrusOne and Data Foundry. SunGard used to be No. 1, but they lost out when they couldn’t deliver the power. Nationally, the leader is probably Equinix, but CyrusOne is gaining ground. You see them in more and more places. One big question for customers is, do you have DCs outside of the U.S.? Businesses are running 24/7 in the global economy and have rolling demands. They may gave a DC in China, Europe and the U.S. to keep operations up and running.”

“We are seeing a lot of outsourcing of IT to organizations and managed service provided who have created hosted service solutions. The IT is in the DC and offers managed IP-based and managed service systems to customers. We see a lot of smaller IT systems integrated into the DC.”

“We see more MSPs being lured into the DCs, not only to use the DC as a warehouse but then also to market to the other tenants. I think these trends are going on in most urban areas.”

“Equinix has a plethora of MSPs and NSPs in-house. These are customers who are paying for their own space and power, but they are also used as a DC tier 3 offering to the DC customers. They are almost DCs within the DC.”

“CyrusOne has been growing rapidly. They are very aggressive. Their facility in San Antonio is full, and they are breaking ground on a new DC. Data Foundry’s facilities are full, and they are adding a second DC in Houston. The building and growth are being driven by the customer appetite and demand, especially from midsize to large enterprise companies that have in-house legacy DCs. As they need more and more, they realize it is very expensive to build, expand and manage the DC operations themselves. Outsourcing is more efficient, more cost-effective and enables redundancy.”

“California has been losing a lot of DC capacity to Texas. The issue is the cost and availability of water and power. Another big component are tax incentives.”

Carrier-neutral and carrier-specific pricing trends “Pricing is hard to predict. The best analogy for predicting DC costs is to look at what happened with carriers: As

bandwidth increased, the carrier costs decreased, dropping about 10% a year. That’s what will happen with DC. There will be a stopping point. We call it ‘the race to zero.’ But the carriers and DCs will offset the losses with additional services for which they can charge a premium. The customer needs these services as the networks became more complicated, and there is more of an appetite for cloud providers and web services.”

“In the next few years, year over year we will see something in the range of a 10% price reduction. But I see the DCs recovering that loss by offering other services.”

“As more DCs offer more and more options, it increases competition, which forces the more established DCs to charge less. … When CyrusOne first moved in to our area four years ago, most of our customers felt they were too expensive. They had a hard time selling space. Then all of a sudden they were full because to stay competitive they

In the next few years, year over year we will see something in the range of a 10% price reduction. But I see the DCs recovering that loss by offering other services.

VP & General Manager National Communications Service

Provider

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had to lower prices. … We are seeing more DCs, but we also are seeing more demand for third-party DCs. The cost for a company to put a footprint in one of the DCs will continue to decline in the next few years.”

Future data center trends “Water is increasingly an issue, especially with the new data centers that are moving from air cooling to water

cooling. All of the servers that go into a DC are a big source of power draw. But the real draw is the need to keep the servers cool to support operations. We see these legacy DCs with big air-conditioning facilities and big cooling systems with a monstrosity of pipes slowly moving toward cooling with recycled water.”

“I don’t know who the winners and losers are in that [water] game. On the air side, one of the most popular manufacturers is [Emerson Electric Co.’s/EMR] Liebert. But they still have a lot of opportunities to grow. There are a number of publicly traded water companies.”

“The big, new fancy data centers are getting away from strictly cooling with air and are factoring water into the equation.”

Local market conditions “We have a number of flavors of data centers in our region, and competition has increased..” “Digital Realty Trust, which is a REIT, has a significant presence in Texas, and their typical model is to create the

infrastructure and then sell the space for lease. Digital Realty still relies on the customer to own and manage services and rack space.”

“CyrusOne has two DCs in Austin. They provide the space, the power and, if needed, the bandwidth. They can provide the bandwidth or they may offer it through another MSP customer within the facility. Cyrus has filled up one facility, and the second one is already half full.”

“Data Foundry has two facilities that are filled to capacity. Like Cyrus, they are expanding. Data Foundry is more involved in customer operations in that they want to control the space, the bandwidth and manage the servers.”

“SunGard has had a long-time data center presence in our area, but they have lost market share in recent years. They had a number of issues regarding space that did not have enough power or water available. They were losing customers, so to drive and sustain growth they decided to offer managed services. They have not been pushing the cloud, just management of services. They also agreed to enter into an arrangement with Cyrus so they could send the customers they could not accommodate to them. I’m sure there is a kickback of sorts for the referral.”

“ViaWest is a downtown DC. It’s not flashy like the newer DCs; it’s more of a space with power, just a building. It is relatively full. We also have OnRamp [Access Inc.]. They are a boutique DC that likes to offer managed services.”

4. Vice president, founder of a wired telecom carrier and ISP throughout California

Prices at core Internet exchange data centers are not dropping, and operators are trying to keep pricing tight. Power rather than physical space determines pricing, as do location and add-on services like Internet hosting. Some big players have a built-in, annual price escalation clause of 3% to 5%. Overbuilding was in an issue during the economic downturn, but the problem is being resolved. Equinix and CoreSite are dominant in the West while Digital Realty and Terremark control the East.

Data center market conditions “All of the key players talk about ease of use and flexibility, and they promote their ability to provide storage and

memory. They are trying to be all things to all people. We do see some of the traditional personal and consumer online storage companies like Box and Dropbox are moving up market [with business offerings]. They are not late in the move, but it is a big step to go from being in the minor league to the major league. They are competing against the big boys like Amazon and Google who have been doing it for a long time.”

“Equinix and CoreSite are the carrier neutral leaders in our [West Coast] markets. We are an ISP and connect with the major carriers such as AT&T, Verizon and Sprint. In the East, the leaders tend to be Digital Realty and Terremark. But I would say that Equinix and CoreSite have the edge.”

“We have a large-scale presence in Southern California and central hubs. … A lot of the data centers down there have reached capacity, but when that happens they tend to expand somewhere nearby.”

“In my case, we have to work with someone who can service all of our needs. … For us to be in a facility, we have to be able to connect domestically and also with London, Korea and other international locations. If the facility doesn’t have AT&T and Verizon, it’s a problem. But most of the big players have multiple carriers in-house, the so-called

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carrier-neutral status. It’s more the second-tier players who you have to question. If we ask who they have and they only have AT&T, we hang up.”

“Some data center building is going on, but most of the DCs I talk to are still getting full. … For us, it’s all about the location and connectivity.”

Carrier-neutral and carrier-specific capacity trends “Most of the big guys have property that still has some capacity, but … it used to be that the data centers were half

full. Now the available space is closer to 10% to 25%. There was some overbuilding, just like there was overbuilding in the rest of the real estate sector. And then during the downturn things just sat. But they are slowly filling up, so it’s less of a problem—if a problem at all—now.”

“Fiber can be expensive, and we now see some of the data centers using their own money to lay more fiber, rather than partnering with carriers.”

“There was some overbuilding of data centers just like in the overall real estate market. As the market improved, that space has gotten taken up. But people are still building in certain areas like Texas and Virginia. Five years ago, if someone tried to sell you on Austin, you would say, ‘Why go there?’ Now it’s a technology center, and you have Digital Realty and others building in Austin.”

“Amazon and Google are building their own facilities because they have such unique features they can’t find adequate requirements at the traditional data centers. If you are a standard facility you come with one or two widgets, for example, but if you are Amazon you might need five or six widgets so you have to build your own data center.”

Carrier-neutral and carrier-specific pricing trends “I don’t see anyone dropping prices. They are holding on to current rates

tightly. But the real cost of the data center is the cost of power. You can discount the heck out of the actual real estate portion if necessary, but power is power and the price of power is not going down. The price is all about the power.”

“[Data center operators] are looking to offer deals, and then customers come in with 15 new processor servers. They are asked about the power draw of the mainframe and never think about the fact that these super-duper servers draw more power.”

“The technology continues to improve and stuff gets smaller. But the denser the server means you have to draw much more power. That is because of the need for enhanced cooling requirements because these things get super-hot. That’s where the cost is increasing. So prices are not going down. The price of power is key.”

“The more popular data center will always have more power over the market and pricing. Some of the big guys even have built-in escalation clauses for pricing outlined in the contract. If you read the fine print, you would see that the agreement includes an automatic price increase of 3% to 5% a year. But if they have a lot to offer in terms of connectivity and managed services and you want to be in that location, you just end up signing.”

Future data center trends “Everyone is trying to figure out the cloud, and everyone is trying to do or is doing the cloud. It’s become a big VC

[venture capital] buzzword. At the same time you have some big players like Amazon, Box and Google building their own facilities and coming out with their own package of services.”

“I don’t know if the open exchange movement is growing or whether it’s code for open, carrier-neutral. All of the facilities started out as public access exchanges in the beginning. As they got purchased or sold, the industry became more commercial.”

4) INDUSTRY SPECIALISTS Six of these seven sources do not think an overbuilding of data centers is occurring. The remaining source has seen some overbuilding, which is leading to a highly competitive market and pressured service pricing. The carrier-neutral capability that once commanded a premium price is no longer a competitive advantage. Key differentiators now are financial stability, facility

Most of the big guys have property that still has some capacity, but … it used to be that the data centers were half full. Now the available space is closer to 10% to 25%. There was some overbuilding, just like there was overbuilding in the rest of the real estate sector. And then during the downturn things just sat. But they are slowly filling up, so it’s less of a problem—if a problem at all—now.

Vice President & Founder Wired Telecom Carrier & ISP, California

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design, staff quality, and performance history. Of the five sources commenting on pricing, three indicated strong competitive pressure, one said pricing is based on the cost of labor, and one thinks the cost of power is the primary price driver. Growth for data centers is coming from enterprise customers, who now accept outsourcing as a viable IT option, and from greater demand for cloud services. One source commented on Deutsche Boerse’s efforts to offer a cloud commodity trading exchange. The exchange could lead to standard technology and lower transparent pricing. Sources reported several emerging trends including the growth of DCIM, modular facility design, liquid cooling, and demand for green data centers. The leading data center providers are AWS, Equinix, CoreSite, Digital Realty, DuPont Fabros, Latisys, Windstream, Raging Wire (of which Nippon Telegraph and Telephone Corp./TYO:9432/NTT owns 80%), TeleCity, Interxion, Telehouse, Vantage and CyrusOne. KEY SILO FINDINGS Data center market conditions

- 6 of 7 sources do not think data centers are overbuilding. - 1 source has seen some excess capacity, which is leading to more competitive pricing. - More enterprise IT departments are looking to outsource in order to take advantage of lower costs and tech

advancements. - Cloud demand is fueling demand for data center services.

Carrier-neutral and carrier-specific capacity trends - N/A

Carrier-neutral and carrier-specific pricing trends - Premium pricing for carrier neutrality is no longer possible as it is not the competitive advantage it once was. - 3 sources said data center pricing is pressured by highly competitive market conditions.

Future data center trends - Modular data center design. - Green data center design and operation. - Expanded DCIM services. - Possible commodity exchange for cloud services.

1. VP of sales for Transitional Data Services

Carrier neutrality is becoming such a standard that customers need not pay premiums for it. The U.S. market overall is not overbuilt. Neither multitier nor hybrid services are taking off.

Data center market conditions “Across the U.S., the market on average is probably not overbuilt. But I’ve seen in pockets where it’s beginning to get

overbuilt. Charlotte [NC] feels like one of them, while in others I’ve seen some pretty poor selections.”

“I do see an increase in investment, interest in companies that have never done data centers before. Quite a few investors are buying up mom-and-pop installations and rolling them into bigger names, and that’s part of why we’re seeing overbuild in some markets.”

“There are other markets where there’s no competition, so the businesses in those markets have little quality to choose from. In one town in the Midwest a client was looking for 600 kW of capacity and couldn’t find a provider in that town with n+1 generators; that’s a standard for enterprise grade. You’ve got your eight to 12 markets where you’ve got really good data center selection [including the San Francisco Bay Area, Los Angeles, Phoenix, Chicago, Denver, Dallas, Houston, New York and New Jersey]; then it drops off very quickly.”

“I’m not seeing a lot of multitiered facilities. Most of the providers like to provide consistent platforms, with standard, consistent maintenance and operations. What I do see, which is a difficult challenge, is that some of these companies have gotten big by acquisition, so they’ll build out umpteen sites. I sat down with one COO and said, ‘You need to start categorizing your

Across the U.S., the market on average is probably not overbuilt. But I’ve seen in pockets where it’s beginning to get overbuilt. Charlotte [NC] feels like one of them, while in others I’ve seen some pretty poor selections.

VP of Sales Transitional Data Services

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data centers. Your centers in Los Angeles and Virginia are top of the line, tier 3. You need to come up with a strategy where you don’t hurt your brand by demonstrating a lower-quality site and promote it as equivalent to your top sites.”

“There’s a lot of talk in the industry and at the trade shows about using hybrid to diversify and put your applications in different places. We haven’t seen widespread adoption yet.”

“Gartner just came out with statistics for 2020 with very large adoption rates of the cloud, and I keep hearing that cloud is continuing to gain momentum, but I’m not seeing it from my enterprise customers. I don’t see that more than 5% to 10% of their data center infrastructure is in the cloud for a typical enterprise.”

“When ecosystems happen naturally, clients respond. When it’s forced, the marketplace feels it and they don’t respond. When I see providers overreaching their expertise is when I see no response. But, for example, with a telco provider in the colo business, the two business units within the same company can complement and help each other grow.”

“Clients are very sensitive to buying from a provider that’s well funded, that offers the confidence of financial security. Other big differentiators I think are in the facility infrastructure design, the operations team, and the past operating history of that firm. Once a facility’s been struck with a power outage, it’s difficult to dig your way out. Competitors are ruthless; they’ll make sure a potential buyer knows XYZ data center went down for 2.7 hours.”

“Digital Realty has 24 to 25 million square feet. DuPont Fabros does well with a lot of dot-coms, and CoreSite, those providers tend to dominate when we’re in discussions with someone who wants a 1 MW or 2 MW pod. When you look at the next group, there’s Latisys, Windstream, Raging Wire, TeleCity, Interxion and CyrusOne.”

Carrier-neutral and carrier-specific capacity trends “Carrier neutrality is becoming a standard. I’m seeing pressure, where providers that in the past required you only

buy their bandwidth and they’re struggling mightily to keep to that same rule, where some of the largest network providers have agreed to allow them to bring in other carriers.”

”[Wholesale DCs are moving into retail.] So far I’ve seen that putting some pressure on the next tier below that is not wholesale.”

“I would argue that you don’t have to [pay premiums for a carrier-neutral data center]. It’s absolutely becoming standard.”

Carrier-neutral and carrier-specific capacity trends “For basic smart hands services where you put a systems admin on the floor to power-cycle a server, those types of

services will follow labor trends. The level 2/3 services, that’s a very hard level to excel in from a colo provider. So level 1, those are very common services and the prices will track the cost of labor.”

Future data center trends N/A

2. President of the data center professional industry association

Overbuilding is not an issue, and the large colocation providers are all building out. Competition has increased, which is driving costs downward. Colos are competing through service and price and by venturing into cloud services. Multitier is more common in private and smaller data centers. DCIM is becoming a reality and is a key trend to watch. For now, only IO Data Centers LLC has a significant DCIM offering. Colos are finding themselves tasked to be more flexible in contracts and forthcoming with information.

Data center market conditions “I don’t think the overbuilding is there yet. I think that these folks are building their data centers to the size of the

market they feel they can fill to, by building out in modules. But the times where you’ll see the 100,000-square-foot data center built on a regular basis is gone.”

“[Premiums are] a changing world as well. Everybody’s got into the business, and there’s more fiber availability for people to be able to transport. A lot of colos may have more than one site available in the U.S., and with the fiber that goes in between those it cuts down on carrier costs. They have to be very cost-conscious of what they charge anymore.”

“I haven’t seen a lot of multitier colocation. I’ve seen it more in the private sector, and I’ve seen smaller data centers segment into multitier. But some of the bigger colos are figuring out ways to get around tiering levels, using software that can move loads around and not have redundant loads doing same the same type of things.”

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“[The ecosystem] all depends on what customers are really looking for. A lot of times they have the equipment and move it to a colo as a disaster recovery site; now they want cloud services as well in a use-as-you-need scenario. Some colos are moving in that direction. With the cloud, the customers use only the CPUs they need, the storage and cooling power they need, whereas in a colo it’s there all the time. But there’s money to be made in both.”

“What [providers are] doing is looking out for customers and being cost-conscious, because now people have the availability to shop around. The colo world isn’t what it used to be even four years ago; they’re a lot more dependable, more professional and cost-conscious. The years of the 10-year contracts are long gone.”

“Geography comes into play when the customer is going for cheap power, and recruiting people to those sites as well. And, of course, having local network availability and fiber all comes into line.”

Carrier-neutral and carrier-specific capacity trends “You won’t see a slowdown in the buildouts with all the data needs to be

processed.” “I don’t see a glut in the industry at all. And in talking with a lot of colo

providers, they don’t talk like that either; they keep building.” Carrier-neutral and carrier-specific pricing trends “The competitive market will keep driving costs down, and there will be

differentiation in contracts and flexibility that wasn’t there just a couple of years ago, which is a great thing.”

“For big players there’s Equinix, IO, Raging Wire. Vantage is another though not as big, and Digital Realty.” Future data center trends “DCIM is one of those words people roll their eyes at, but now it’s becoming a reality. In other words, that software is

able to manage how a DC reacts. If you have spare computing power you can shift your load to one area, and if it gets too hot in that area you can shift elsewhere. It’s not a true reality yet, though IO has something like that.”

“At the latest Data Center World, the colos were open and honest in telling customers what to look for, how to manage contracts, and having end users talk to the attendees to let them know what they’re getting into. [Customers] are getting more savvy, and the colo places understand that and are becoming a more customer-focused environment.”

3. Principal research contributor

Carrier neutrality is “table stakes” and not a differentiator. Locality is a differentiator, as are multitier capabilities, meeting industry and government requirements, and density in space and power. Building is plentiful, and none of the colos has reported any unused inventory.

Data center market conditions “I just had a meeting with Equinix last week at the Amazon show. It seems to be a good time for the big facilities

because there’s more service providers to help drive people to the cloud, and even companies like Amazon will leverage what big data facilities are doing. People who can deliver highly efficient power-cooling dense environments—there seems to be good growth.”

“The way most companies are going is mixed, but that means they have some applications they’re running in-house, some they’re running in some cloud environment, and also consuming SaaS. We’ve found that’s a lot less prevalent in reality.”

“We’re seeing all sorts of levels of services. At the Amazon show last week they released a whole number of instances where you can have cheap and low-performing, super-fast and high performing, and everything between. Cloud services are not homogenous, and if service providers offering tiers, there’s definitely a market for those.”

“[The ecosystem is] definitely growing in importance. Networking can be the secret weapon for those providers. Moving your data is not a trivial task. If they have strong networking capabilities and I can have my data at a colo facility and need a cross-connect cable, there’s huge opportunities to leverage data. And in some cases you might even find different industries can create community clouds with sources of data nearby.”

I don’t think the overbuilding is there yet. I think that these folks are building their data centers to the size of the market they feel they can fill to, by building out in modules. But the times where you’ll see the 100,000-square-foot data center built on a regular basis is gone.

President Data Center Professional Industry Assn.

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“[Differentiators tend] to be locality and if it’s an industry focus where certain governance and requirements issues apply. Absolutely, providers have to meet certain industry and government requirement needs. And there are plenty of companies that need low-latency applications, and they’ll focus on centers in their areas.”

Carrier-neutral and carrier-specific capacity trends “[Capacity is] tough to generalize. Depending on a locale, there might be

plenty of room for growth. On the vendor side, the big service providers, their density of power is one of their key differentiators. I don’t think anybody has limitless space or power, and every year power gets more critical. The more we can do to make space and power more efficient, the better. The density you find in Japan, by the way, is ridiculous.”

“I wouldn’t say that [colos] are necessarily out of space, but companies are willing to pay more to use less space.”

“In some places, telcos may have overbuilt optical environments. But it’s not as prevalent in the server provider space; no one’s saying, ‘I’ve got a million square feet.’ Most are talking about rapidly building data centers.”

Carrier-neutral and carrier-specific pricing trends “[Carrier neutrality is] becoming much more common. I’ve talked to so many data centers that provide the flexibility

to begin with, I think being carrier-agnostic is table stakes at this point.” Future data center trends N/A

4. Data center consultant and researcher curating the industry’s largest database of data centers

Demand for carrier-neutral data center space is growing in European metro areas as multinational corporations look for one vendor to offer multiple data center sites throughout Europe. Demand also is growing for slightly more remote secondary sites used mostly for disaster recovery.

Data center market conditions “Especially in the metro areas, the data center market is more competitive than ever. It’s all about having a lot of

presence or locations instead of being a small local provider. U.S. companies doing business in Europe want one provider that they can use in multiple countries, like TeleCity, Equinix or Telehouse.”

“The market seems to be really a game today of data centers becoming larger by buying up the smaller ones. The goal is to get a wider presence for customers who need multiple locations.”

“There’s no overbuilding, especially in [Europe’s] metro areas because demand is going up. No one is having any problems selling their space.”

“Connectivity is a differentiator among data centers; having a large selection of carrier connection to the building is a selling point.”

“The companies that call us for advice on data center selection today have questions on tier level, connectivity and what specific certifications a center may have. They seem to know what they’re looking for and are mostly shopping by price.”

Carrier-neutral and carrier-specific capacity trends “From a technical standpoint, yes, I think wholesale data centers are

competitive. A lot of the wholesale operators have been selling space to colocation providers for many years, so they know both sides of the industry. After all, the ‘core’ product they are selling [space and power] is more or less the same—just packaged differently, usually smaller. However, it is a dangerous game as they might scare colocation providers away as future customers, by starting to compete with them.”

Carrier-neutral and carrier-specific pricing trends “Companies will continue to pay a premium for a carrier-neutral data center, but non-neutral centers are also not a

problem as long as the carrier is good.”

[Carrier neutrality is] becoming much more common. I’ve talked to so many data centers that provide the flexibility to begin with, I think being carrier-agnostic is table stakes at this point.

Principal Research Contributor

There’s no overbuilding, especially in [Europe’s] metro areas because demand is going up. No one is having any problems selling their space.

Data Center Consultant & Researcher Curating Data Centers Databases

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Future data center trends “We’re seeing growing interest now in secondary sites for disaster recovery. Companies that already have either

have their own data center or use data center provider are looking for a wholly separate site. Technically these secondary sites are the same—just usually a smaller site—and they have geographic requirements to be a certain distance from the primary site. Disaster sites also may have fewer technical and certification requirements.”

“It is very hard for new Internet exchanges to gain traction, as most companies select Internet exchanges based on the number of companies already connected to the Internet exchange. An Internet exchange without any members connected is worthless. The more members, the more benefits there are from connecting. Therefore, there is typically one really huge Internet exchange per metro and several smaller ones that are struggling to keep up. However, there will always be some business for the smaller ones and the new ones, as cost is also a deciding factor for some companies. The large carriers, though, will be hard to attract.”

“If Open IX were to succeed as much as the leading established Internet exchanges, it would obviously take away some of the advantages providers like Equinix and CoreSite have in the U.S. today.”

5. Data center consultant and founder/associate of an annual think-tank symposium; repeat source

Data center pricing is under pressure in certain markets because of facility development, heightened competition and the availability of cloud and hosting services as enterprise customers adopt outsourcing. Pricing, however, is poised to shift to a commodity trading exchange, which Deutsche Boerse plans to launch in 2014. Demand for hybrid, multivendor/carrier facilities continues to grow. Access to power drives capacity growth. The source believes the most important industry development is growth in and deployment of modular design infrastructure systems, an alternative to traditional data centers that fits all equipment into a portable or containerized capacity module that can then be shipped, integrated or retrofitted into existing data center facilities to enable rapid capacity growth. AWS is the 800-pound gorilla and has an increasing influence. It has joined traditional leaders like Equinix and Digital Realty Trust.

Data center market conditions “The data center market continues to be very competitive in most key locations. It is competitive both in terms of

demand and the building of space. There is pressure on the service agreement prices because you cannot separate the demand from capacity issue.”

“You will always have some overbuilding. There are so many different factors driving the market. The result of successful virtualization of services and movement to the cloud and hybrid facilities results in increasing consolidation of the facilities and that increases demand for more, newer providers and services.”

“Because of the dynamic load of many of the enterprise [DC] owners, an increasing number of companies are looking to punch out, to close the legacy data center and look for outside facilities that they can move to, to facilitate internal growth. They either look for pure leasing or some form of colocation.”

“The competition and hybrid facilities are pressuring pricing, but it is very difficult to quantify because the level of competition, facility providers and pricing varies by market.”

“Reason tells us that, yes, there is movement in general away from the corporate-owned data center to the REIT and colocation. And there is movement toward managed services. There is a clear trend driving CIOs to look outside and across all of the different opportunities for capacity and outsourcing. The data center today and in the immediate future, in truth, will be a multipurpose location. You can go to a colocation facility, but you may want one with managed services. You may have applications you want or need in the cloud, so you search for hosting.”

“The data center developers at this point will want to have the ability to offer all or any of those services. The hybrid appeals because the CIO looks at the situation and feels comfortable with outsourcing certain operations into a private cloud and may feel comfortable outsourcing certain sets of application to a colocation space. But there may

You will always have some overbuilding. There are so many different factors driving the market. The result of successful virtualization of services and movement to the cloud and hybrid facilities results in increasing consolidation of the facilities and that increases demand for more, newer providers and services.

Data Center Consultant & Founder of Annual Think-tank Symposium

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be other operations they still want to run in-house. Fewer and fewer CIOs believe it is a good use of capital to run their own operation. They are pushed by the high cost of capital expenditures and because the operations are expensive to run. The data center developers are at an advantage because they can build facilities faster and better and meet the industry requirements, more easily than the owner-operator.”

“All of the key players know at this point that it’s important to offer a variety of platforms and vendors and an array of connectivity relationships in their facilities. They may even have services that compete with their own. The data center is becoming a capacity exchange wholesaler that can have two or three different competing hosted or managed services in-house. They all offer the same set of services at this point.”

“If you are placing your bets with companies that lead the data center real estate space you may want to consider that the data center as a real estate item in itself is about one-tenth the value of the proposition. Invest in what’s inside. The best bets will be the cloud players like [Microsoft Corp.’s/MSFT] Azure and Amazon and IBM, the people creating the infrastructure and platform-as-a-service [PaaS]. Just look at what Digital Realty Trust is doing now: They are moving toward a modular international presence. In some cases they build their own or in some cases they are the provider or acting as something else. This is a very complicated time in the market. There are many moving parts. Managed services and infrastructure as service are the fastest growing segments in this market.”

“Equinix is still big and is busy developing in Europe. By the time they looked at North America, it was pretty crowded.”

“There are four or five leaders in the worldwide market. In this arena, AWS is the 800-pound gorilla in the room. Equinix and Digital Realty Trust are building facilities that AWS will want to lease. Digital Realty’s relationships are all over the map at this point. ASW may pose a threat, but they are a dominant play today. And the people they are most competitive with are Microsoft and IBM and Google in the cloud space.”

Carrier-neutral and carrier-specific capacity trends “The need for capacity is growing as fast as the number of data centers. It’s not just a matter of capacity in terms of

physical space. The real issue is whether you can deliver the power needed to sustain operations. There continues to be significant churn as existing facilities become obsolete and evolve.”

“There really are only four or five vendors making the modular data center components that can be moved into the existing footprint. With the portable modular units you will still see building, but it will be just a big shell. Instead of equipping it from day one with infrastructure, you can now come in with as many modular units as you need to meet current capacity. It’s a smarter, more economical, less expensive way of designing the data center offering. The real estate developers still sell customized facilities, but it is the most expensive way to build. The newer data center are being built for the modular design. The modular design is driving standardization.”

“You can get a data center now whenever and wherever you want because of the cloud. Everyone has been concerned about the threat of disaster since Hurricane Sandy. Because of the cloud and because of telecom improvements, customers can migrate away from expensive locations into places like Arkansas, Utah, Colorado or Minnesota.”

“There is development in the secondary markets, and they may be taking a big risk that customers will move from primary markets to secondary markets. We see colocation in secondary markets that is filling up that space, but it is just a temporary situation. Most developers are partial to an economical strategy and standardization, and that is not to meet a market demand.”

Carrier-neutral and carrier-specific pricing trends “Pricing pressure is already happening now and the cloud and connectivity will make it an imperative as demand

grows. People will have to leave their legacy environments. They have a way to go. Not even half of the enterprise corporate market is prepared to make the move yet.”

“There is a spot [pricing] market when there is overbuilding but just until the availability is absorbed. It’s nothing like conditions during the dot-com bust when Silicon Valley was awash in low-quality server space.”

“End users are willing to pay premiums, but it is all based on the SLA [service level agreement] requirements. But premium pricing has existed because the owners and operators were able to get away with it. … The colocation market is still the Wild West, and the operators are still pricing based on what they can get away with.”

Future data center trends “Data Center pricing will become more transparent. Are the providers of the space going to worry about premium

pricing or getting enough contracts in one place?” “We are headed for a market that looks like a commodity trading market. We already have commodity exchanges in

the mobile market. And now Deutsche Boerse is developing a cloud exchange based on this approach. They are planning to launch next year. In the not-too-distant future when someone looks for data center space with power, it

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will go out to bid and you will buy it on the open market. If you are moving to the cloud and your CIO knows what set of applications he has and what the capacity requirements are, why would you go to a trading exchange for the best price?”

“The Open IX is gaining traction, and it ultimately means the exchanges will be open and transparent. The telecoms at large already accept this development, certainly in Europe and in Asia. The U.S. can’t be left behind.”

“On the design side, fluid cooling and fresh air cooling are the future. Water cooling is 3,000% more efficient than air system cooling, so if someone can create a fluid cooling system it would give them an advantage. If you are an existing data center you are not going to scrap your air handling system because of the capital outlay and new expense. It would be a challenge unless you had a specific room or set of racks that could rely on immersive cooling.”

“They all offer the same stuff, but modular design is driving facilities to standardization.” “The data center industry was iconoclastic and customized. The move now is toward standardization, and that will

become a requirement of the cloud because the cloud is opaque.”

6. Seasoned IT consultant experienced in helping organizations improve delivery of data center services

Companies are looking to shutter their existing data centers and sign on with carrier-neutral providers that can offer a variety of services and staff. Doing so ultimately will be less expensive given this market’s rapid technological evolution.

Data center market conditions “Before the economic downturn companies were building their own data centers, but now the trend is to go with data

center providers. Economic factors influence this decision.” “If you’re in finance, why are you thinking of building your own data center? It’s an exception today that a company

would want to build their own data center. Most are looking to get out of the data center business. Yet, we still have companies—mostly government entities and some universities—insisting that they need their own data center.”

“The data center market is evolving as we progress through technology advances. The marketplace today is still competitive, it’s still a growing environment.”

“Some companies with their own data centers are keeping them for secure data and going with an outsourced data center for other infrastructure environments.”

“Wholesale data centers are being edged out of the market buy the data centers that offer more services.”

“There are more players in the marketplace today, but I see those reducing over time to just the big players offering complex, full-service environments.”

“There was a long run in London, many years, where we had a very small availability of data center space. But today with more colocation providers there’s more money available and there’s more speculative building going on so prices may drop a little bit.”

“Some data centers that are in the wrong locations [outside of city centers] have ample space right now, but I see that changing over time as there’s a cultural shift in companies that will make them more comfortable with remote access to their data. They’ll be no reason to actually visit their servers anymore.”

Carrier-neutral and carrier-specific capacity trends “Carrier-specific data centers are being pigeonholed. They will end up shooting themselves in the foot because

they’re reducing the service options that companies require. Even carriers are building data centers that are carrier-neutral.”

Carrier-neutral and carrier-specific pricing trends N/A Future data center trends “A data center is built for 15 to 20 years, so they have to be upgradeable environments. We will need to be able to

tune them up to be competitive. I see data center builds around London today that I know won’t make it in 10 years’ time because they are not upgradeable.”

Carrier-specific data centers are being pigeonholed. They will end up shooting themselves in the foot because they’re reducing the service options that companies require. Even carriers are building data centers that are carrier-neutral.

Seasoned IT Consultant

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“The greener the data center, the more popular it will be. Big companies want to be seen as being in green data centers. Over time, financial considerations will drive the growth of greener data centers because the cost of power is rising and data centers will need to become more efficient facilities.”

“Another trend is companies contracting a colocation provider, like Infinity, IO, Equinix or Cyrus to build and run their data center to specification. Some financial companies are going with this custom build solution.”

7. Executive director of a European data center association

No two data centers are alike, and the lack of standards and transparency may lead to industry commoditization because enterprises and consumers lack a full understanding of the providers. Wholesale data centers outside of Europe’s city centers are growing and reselling space to the retail data center market as larger colo providers buy up smaller ones.

Data center market conditions “The data center industry is probably at risk of becoming commoditized because we’re not providing the right

information to the client. I see companies comparing data center proposals where one is €10,000 a month and the other is €20,000 and the specs of the services are virtually identical. There is a difference between those two proposals, but you have to be an expert on data centers to discover it. The industry isn’t offering much clear and trusted information, so it’s no wonder that we may find ourselves being commoditized.”

“The industry really has to guard against commoditization by doing more to explain to consumers what data centers are and what they do. The fastest way toward commoditization is when your customer doesn’t understand what you’re selling.”

“Industry standards might be a solution to this problem of consumer education. The Data Center Alliance launched a certification scheme as a kind of a verification of data center offerings based on site visits. It’s a completely transparent evaluation. I think industry self-regulation of data centers is a better option than blunt-instrument legislation.”

“Because of the global economic downturn, some of the planned data center builds of five years ago didn’t happen so there was a slowdown in the growth of data centers. Today I think demand is picking up. There are new entrants into the data center industry, specifically companies in the building and property markets.”

“There’s growing development of the wholesale data center market. Investors want to stick on the safe side and go with the wholesale shell model. The wholesale data center then goes and sells space to colocation providers. In other words, the retail side is taking space within the wholesale side. For example, Virtus, on the wholesale side of data centers, sells space to more retail type colocation providers, including Daisy [Group plc/LON:DAY]. Digital Realty Trust is another company with a large data center foot print across Europe that has as its target market smaller colocation providers and enterprises.”

“The data center industry is growing comparatively well compared to other industries in today’s economy.” “As the market has picked up, we’ve also seen smaller data centers enter the market.” “There’s also a power-blocking going on as well over the last five years as bigger players in the data center industry

acquire market share by buying out the small players.” “There are always four main things that customers look for in a data center in varying order: resiliency, a well-

managed and staffed center, security, and growing in priority is energy efficiency.” Carrier-neutral and carrier-specific capacity trends “Most of the newer builds are carrier-neutral, like the one in Newport, Wales [Next Generation Data’s Newport data

center, which is one of Europe’s newest and largest data centers offering tier 3 colocation]. At first, this data center lacked any connectivity so it needed an investor to be the first; then other carriers brought in and laid their fibers as customers demanded.”

“They can still charge a premium for carrier-neutral data centers.” Carrier-neutral and carrier-specific pricing trends N/A Future data center trends “There’s also been a change in where data centers are being built. The main area for data centers used to be in the

major cities: London, Paris, Frankfurt, Amsterdam. But today we’re seeing regionalization of data centers for a number of reasons. The first consideration when looking at data center location is the availability of power. Heavy industry areas generally have more power available at lower prices than cities. Some newer sites have been chosen

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for their open space and ability to build larger, more efficient facilities. Couple this with the relaxing of software licensing restrictions over country borders. And less centralized data centers are an emerging trend.”

“One overriding trend in larger data centers is the modular approach that builds in flexibility and provides energy efficiency right away. For the smaller data centers, they’re looking for all sorts of ways to retrofit and get more kilowatts per rack and ever-higher rack densities.”

“There’s a big push toward green data centers. Energy prices are high in Europe. Half the cost of any data center is energy. Plus, green is good marketing.”

Secondary Sources The following seven secondary articles highlighted the growing demand for green data centers, companies consolidating and upgrading facilities, and the expansion of data centers in and outside of the United States. DATA CENTER MARKET The following two articles discussed the growing global demand for green data centers as well as companies’ efforts to consolidate in order to upgrade facilities. Dec. 2 article from 4-Traders

The global green data center market is set to grow at 29.48% through 2016, but could be held back by capital investments.

“The analysts forecast the Global Green Data Center market to grow at a CAGR of 29.48 percent over the period 2012-2016.”

“One of the key factors contributing to this market growth is the increased deployment of data centers. The Global Green Data Center market has also been witnessing the increased adoption of unified communication among enterprises. However, the requirement for huge capital investment could pose a challenge to the growth of this market.”

“The key vendors dominating this space include Cisco Systems Inc., Dell Inc., Hewlett-Packard Co., IBM Corp., and Oracle Corp.”

Dec. 1 Washington Post article

Data center demand is growing, but companies are consolidating and using server virtualization to better suit their needs. Some components holding back the consolidation are the movement of employees as data centers close and the lack of initial investments for the initiatives.

“Nearly four years after the federal government implemented the Federal Data Center Consolidation Initiative, agencies have closed 946 data centers. But clear results are hard to measure and there’s work still to be done.”

“Agencies’ inventory efforts have identified 7,000-plus data centers, a number that has shifted as the definition of a ‘data center’ has changed. Agencies are using cloud computing and other techniques to reduce the number further and save costs.”

“Server virtualization, or the use of software to allow one machine to host multiple environments, helps agencies decrease the number of servers and lower power consumption and maintenance costs. Some agencies that have implemented server virtualization have reduced the numbers of servers they need to function by up to 90 percent.”

“These investments are paying off in the form of newly available floor space, savings on energy expenses and operations and maintenance costs, improved visibility into information technology infrastructure and better use of IT personnel.”

“Agencies are having a tough time coming up with funds to invest in these initiatives, even in cases where return on investment is expected in three years or less.”

“Many agencies claim that cultural issues are one of the biggest challenges to data center consolidation and optimization. When resources are freed up or data centers closed, employees may be forced to move or the nature of their positions may change.”

“In most cases, agencies are purchasing products and services related to data center consolidation and optimization incrementally, regardless of the contract program they ultimately use to fulfill the requirement.

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Data Centers

Most data center requirements put out for bid are not whole-facility or sub-agency optimizations on a grand scale. Instead, agencies are inviting bids for specific components of these efforts, such as planning, moving a specific function to the cloud or implementing virtual desktop infrastructure for an office.”

COMPANIES The following five sources showed Equinix increasing its options in conjunction with AWS; TeleCity expanding its presence in Europe and acquiring an Internet exchange in Poland; Interxion expanding its footprint in Germany; and CyrusOne reaching over 1 million square feet in data centers with its newly commissioned facility in Texas. Oct. 23 Yahoo article

Equinix is providing more connectivity options in conjunction with AWS to offer customers more flexibility and lower costs. “Equinix, Inc., the global interconnection and data center company, today announced that Amazon Web Services

(AWS) is offering expanded connectivity options for AWS Direct Connect from Equinix International Business Exchange™ (IBX®) data centers located in six key markets around the world.”

“Additionally, Equinix is now offering connectivity to AWS via the Equinix Ethernet Exchange to better support private access to the cloud where service flexibility is increasingly important.”

“This option provides customers with multiple connection options below one gigabit per second, with the ability to burst, enabling customers to lower interconnection costs and providing more consistent network performance.”

“With more than eight million lit buildings in 17 markets available through the Equinix Ethernet Exchange, customers can leverage the density and global reach of the exchange fabric to interconnect with pure-play cloud companies such as AWS, creating the optimal location to deploy a cost-effective, high-performance hybrid IT architecture.”

Oct. 1 Data Centers Dynamics article

TeleCity is focusing on the European, Russian and Baltic markets as it adds its fifth data center in Finland. Electricity costs for data centers are going to be cut in half in 2014.

“UK data center operator Telecity has opened the first phase of its fifth data center in Finland, a facility in Helsinki that is targeted at the growing Russian and Baltic markets.”

“Called Hansa, the data center has been located close by to a 195MW power plant in the Vantaa financial services area to ensure resiliency for its later stages, which once complete will make it the third largest carrier neutral data center in the country, with 5MW of customer capacity.”

“‘Finland is a major strategic European internet hub with excellent operational conditions, in terms of both location and premium infrastructure,’ [TelecityGroup Finland managing director Marko] Vanninen said.”

“Telecity said 80% of all internet traffic running between Western Europe and Russia passes through Finland and the location also offers a good inroad to the Asian markets.”

“Telecity already has four other data centers in Viikinmäki, Suvilahti, Pitäjänmäki and under the Uspenski Cathedral in Katajanokka in Finland.”

“The government has proposed cutting the current tax rate for electricity for data center operators, lowering it from 1,703 cents per kWh to 0,703 cents per kWh from the beginning of 2014.”

“Despite the possibility of changes in taxation, Telecity has still built energy saving technologies into its new data center including technologies that allow it to recycle waste heat.”

“It believes the facility has a design Power Usage Effectiveness (PUE) of below 1.3.”

Nov. 11 article from 4-Traders TeleCity is acquiring PLIX, Poland’s largest Internet exchange, to further its push into the country’s market.

“TelecityGroup, Europe’s leading provider of premium carrier-neutral data centres, has today announced an agreement to acquire PLIX, the most-connected independent colocation business in Warsaw, Poland, which also incorporates the largest Polish internet exchange.”

“PLIX customers include major international and domestic leaders in communications, cloud, content and applications, underlining the strategic importance of the data centre. The PLIX internet exchange, meanwhile, is

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Data Centers

experiencing strong growth and has over 220 members and 300Gbits/s peak bandwidth throughput, making it the seventh largest such exchange in Europe and the eleventh largest globally.”

Oct. 8 Virtual-Strategy Magazine article

InterXion is planning to launch its ninth data center in Frankfurt and is accelerating its eighth data center to keep up with strong demand in Germany.

“INTERXION, a leading European provider of carrier and cloud-neutral colocation data center services, today announced that it will construct its ninth data center on its Frankfurt campus (’FRA 9’) in response to customer demand.”

“FRA 9, which is scheduled to be operational in the first quarter of 2014, will be built in a single phase and will provide approximately 800 square meters of Equipped Space and 1MW of customer-available power.”

“‘Demand for our products and services continues to be strong in Frankfurt, supported by our Communities of Interest approach and bolstered by the stable German economy. We are experiencing growth across multiple segments, including cloud providers, financial services, and digital media,’ said David Ruberg, Interxion’s Chief Executive Officer.”

“The capital expenditure associated with FRA 9 is approximately €13 million. The site, which is secured by a long-term lease, will access existing campus power and will leverage the high connectivity available at Interxion’s Frankfurt campus.”

“In response to continued demand, Interxion is also accelerating the availability of the second phase of its previously announced FRA 8 new build. The revised schedule has the second 900 square meter phase scheduled to be operational in the second half of 2014 instead of 2015. The first phase is on schedule to be available in the first half of 2014.”

Oct. 23 Converge Network Digest article CyrusOne has more than 1 million square feet invested in data centers thanks to its newly commissioned Texas facility.

“CyrusOne reached a company milestone: 1-million-square-foot mark of raised white floor space in its 25 carrier-neutral data center facilities across the United States, Europe, and Asia. (1 million square feet = 92,903 square meters).”

“CyrusOne crossed the milestone as it recently commissioned a new 60,000-square-foot data hall at its Carrollton, Texas data center, which the company said is now the largest and most energy-efficient multi-tenant data center in the state.”

Additional research by Seth Agulnick, Carolyn Marshall, Dann Maurno and Carolyn Schwaar The Author(s) of this research report certify that all of the views expressed in the report accurately reflect their personal views about any and all of the subject securities and that no part of the Author(s) compensation was, is or will be, directly or indirectly, related to the specific recommendations or views in this report. The Author does not own securities in any of the aforementioned companies.

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