Wholesale Data Center Outsourcing: New Perspective in New Markets

Kenneth R. Parent, CEO, ByteGrid Holding LLC
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Kenneth R. Parent, CEO, ByteGrid Holding LLC

Virtualization, SaaS and cloud computing continue to propel enormous growth in data center and IT outsourcing services. At the same time, the role of the CTO is changing as large enterprises and government organizations increase their focus on the need for IT to deliver business value. Increasingly they are taking a more service-centric approach to outsourcing IT infrastructure freeing up internal IT resources to be more aligned with business objectives.

Choices are Everywhere

Leading IT service providers such as a Savvis, Equinix, and Rackspace specialize in retail hosting services leveraging a variety of owned and leased multi-tenant data centers. They provide large and mid-size enterprises with premium managed and unmanaged IT services and solutions ranging from colocation to managed hosting to cloud computing, as well as related network, professional services, and customer support. Retail customers lease individual spaces within a data center, usually in a caged-off area or within a cabinet or rack.

Wholesale data center leaders such as Digital Realty Trust (DRT) and DuPont Fabros specialize in buying, selling, and in some cases, operating large data centers. Their customers are large and mid-size enterprises, government entities, service providers, and cloud providers.

Wholesale customers typically look for greater control by leasing dedicated, fully built data center space within an ultra-secure data center and provide their own equipment, management and support resources.

Modular providers such as IO and NextFort provide smaller, self-contained units of data center space – either as wholesale data center space or as a managed infrastructure solution. Modular customers range from large enterprises to smaller companies such as cloud providers seeking the flexibility of purchasing incremental data center space and capacity associated with modular solutions.

Focus on Wholesale

So what is a wholesale data center and what makes it such a competitive and lucrative business model? In its simplest form, wholesale data center companies are real estate companies. DRT and the large players focus on finding existing data center facilities they can buy and resell, or leaseback for a profit. Wholesale offers greater control and higher security than highly transient retail colocation space.Wholesale customers pay a premium over typical leases for general office space, but have much greater speed to market and are spared the capital investment required if they were to construct their own data center. But it is not a fit for everyone.The economics of wholesale space is usually more attractive to customers with larger IT infrastructure requirements (at least 20 racks) and the ability to provision their infrastructure.

The large wholesale providers are nearly all publicly traded companies and tend to focus on six tier 1 markets known for having the highest concentration of data center facilities, power and core Internet availability – New York, Chicago, Northern Virginia, the San Francisco Bay area, Dallas, and Los Angeles. These wholesale leaders tend to stay in these large markets where they have an established presence and resources, and much of their strategy focuses on build or buy real estate transactions. And while they will invest in certain data center upgrades and renovations, their number one responsibility is to shareholder value. Any why should not it be? With their size and scale they are able to raise capital at six percent invest it at 12 percent and create shareholder value instantly. Taking on additional expense and resource allocation required to renovate a single facility that has little impact on the company's valuation usually does not make sense.

It sounds simple, but wholesale data center transactions are not for the faint of heart. Barriers to entry are particularly high when you consider the substantial dollar capital investment and technical expertise required to build or buy a large data center facility. Very few investors are willing support speculative data center builds and they are wary to commit without large enterprise or government customers in place.

Flexible Model for Evolving Needs

With a business strategy focused on undeserved areas of major markets comes added risk and opportunity. It is much more than a real estate model. There are limited data center assets to choose from compared to the larger markets and we recognized the need to invest in and upgrade most of them. This requires a high degree of financial and management acumen to make the right decisions on acquisitions.

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