Getting up to speed with the global data centre market

THE CURRENT MACRO TRENDS driving the growth of data, and in turn the data centre industry, are incredible. The recent proliferation of tablets and smartphones, coupled with the content required to satisfy the (seemingly insatiable) end user needs, has led to an increased demand on data centre services, which only appears to be heading one way. Across the globe billions of dollars are spent on data centre infrastructure in order to meet the growing demands of businesses and their customers. Having the right data centre infrastructure has become the new “arms race” for companies trying to differentiate themselves in this crowded, technology driven world.

Aside from the macro trends, and even taking into account the current turbulent economic climate, the demand for data centre services has continued to rise and this is clear from our survey results. There are a number of factors driving this: (i) many companies have taken the decision to consolidate their collection of server rooms and data centres into centralised regional sites; (ii) virtualisation and compression technology are enabling companies to do more with their technology assets, which means that companies are able to deploy more (and use more) data heavy applications, thus increasing demand; and (iii) the relatively recent exponential growth of Cloud based solutions (and cloud vendors) which require more data centre infrastructure to support their offerings.

What is particularly interesting though is how this all plays out in the local markets. Analysing the data supporting the global themes, we can see clear regional variations driven by relative market maturity, customer demand, investor appetite and the strength of the local economy, which are the real factors driving or inhibiting growth. It is clear that data centre customers and suppliers that understand the local market differences, but recognise the importance of data centre infrastructure being core to their own/their customers’ business; and can reposition data centre strategy as a central enabler to digital growth, will be the companies that flourish over the next few years.
Global outlook
The evolution of technology and IT is placing ever increasing pressure on businesses. How and where to store data remains a key question for many CIOs and CTOs. As the need to increase storage capacity escalates, driven by the growth of data hungry customers and applications, the continued prevalence of cloud and the explosion of “Big Data”, the need for data centre services continues to grow to new heights. The race to stay ahead of the game has meant that many online businesses such as Google, Facebook and Amazon have had to invest heavily in their data centre infrastructure to enable the launch of new products and services.

Although prospects for the global economy remain uncertain, indications from our survey suggests that those central to the data centre market continue to feel positive about the prospects for the industry as a whole, and in line with the macro trends, expect growth in the data centre sector over the next few years.
In terms of feedback from different categories of respondents, the following groups all felt overwhelmingly positive in respect of the outlook for the global data centre industry:
 Financiers are largely positive – 76% were positive about the outlook for global data centre industry
 Customers – 62% were positive about the outlook for the global data centre industry
 IT/Telecoms Consultants – 65% were positive about the outlook for global data centre industry

Where is the growth coming from?
It is evident from our findings that over the next few years the data centre industry is set to grow dramatically. However, the more interesting question is where will the growth come from and which are the “hot markets” right now.

Although negativity has been seen largely across Europe due to the weakened economy, green shoots are starting to appear in these domestic markets, with many large organisations set to expand their data centre capacity across European markets in the next 12 months.
Continued growth is also expected to be seen across Asia-Pacific, as many businesses express their interest in data hub locations such as Hong Kong, Singapore and Tokyo. This, combined with the continued increase of infrastructure and data centre outsourcing by major Indian and Chinese technology players, is all contributing to growth in the Asia-Pacific region.

Of our respondents, (12%) felt that the UK offered the most opportunity for growth in the data centre industry in the next three years, followed by Central and Eastern Europe (11%) and China (10%). The Nordic region was identified as another area for growth, particularly for data centre build activity.

Our respondents also outlined that they too expect to see specialised co-location providers to be one of the most active in developments in the sector over the next 12 months, this was followed by data centre construction and then managed service providers. This rings true with what we are seeing with certain co-location providers trying to re-position themselves as more central to the IT strategy of an organisation, rather than being viewed as a traditional real estate play.

Who is funding this growth?
Respondees expect to see specialised data centre providers and developers more active over the next 12 months, as well as an increase in the volume of private equity (PE) backed data centre projects emerging. We are increasingly seeing new funders and players moving into the market as they look for a new (and relatively secure) asset class to invest in, or to broaden their investment portfolio.

In terms of the key players who are funding growth our results show that they are broken down as follows (i.e. those funders that respondents believe are likely to be most active in 2014):
 Specialised data centre developers/owners – 32% (and of those who felt specialised data centre developers would fund growth 30% were from the UK, 8% from the UAE and 8% from Germany)
 Private equity – 22% (and of those who felt that PE would fund growth in the sector 61% were based in the UK)
 Specialised real estate investors – 12%
 Traditional real estate investors – 6%
Opportunities
A recent IDC report notes that data storage requirements by 2020 are set to reach 40 zetabytes (i.e. 40,000,000,000,000,000,000,000 bytes of data). This, along with the other macro trends identified, is going to have a massive impact on the data centre industry. However, set against this positive backdrop, there is still huge financial pressure on businesses to reduce their IT spend and be more creative in the way that they use and purchase data centre services (and how they approach their data centre infrastructure).

With a key emphasis being on demand driven or consumption based models, so that customers only pay for what they use. Companies that are able to harness these competing factors and recognise the seismic change that is taking place in terms of how customers procure (and wish to use) data centre services, will be better placed to leverage the current opportunities in the data centre market and achieve growth.

Respondents outlined a number of interesting responses in terms of the key factors they believe will create growth in the global data centre sector in 2014.
 Big data and virtualisation
 Africa is a massive frontier for growth and infrastructure development
 As technological issues become more complex the demand for professional guidance increases
 Business digitalisation
 All things “cloud computing”
 Data Centre Infrastructure Management (DCIM)
 Emerging markets
 Green IT
 New technologies
 Mobile technology
 New data centre builds
 The opportunity to cut costs

It is interesting to note the wide range of responses, suggesting that rather than viewing data centres as one homogenous category there is a diverse spectrum of requirements depending on which part of the market you are aligned with, and this is a key theme that we have seen come through from the analysis of the survey results. This is why local knowledge is so important in this sector (and why our clients appreciate the ability for us to advise on, and differentiate between, the global and local drivers) to understand how this will impact the way the industry develops from country to country, and how this will shape the manner in which data centres are located, financed, built and marketed in each country.

Challenges
Generally, IT/Telecoms consultants felt that lack of domestic infrastructure was a key challenge in particular markets. IT/Telecoms consultants, real estate developers and hosting services providers all felt that over-regulation was another crucial challenge. For data centre customers, security was the main challenge. Hosting services providers often felt that a punitive tax regime (or lack of tax incentives) was hindering growth in certain countries.

Particular challenges and inhibitors to growth in new and emerging markets were (i) poor in-country infrastructure (37%); (ii) lack of funding (16%); and (iii) political instability (11%).

The impact of regulation and legislation
Trying to tackle the impact of regulation and legislation was identified as one of the main drivers for customers making the decision to use data centre services. 25% of respondents felt that this was in the top three most important drivers (putting it at number 2).
This chimes with what we are seeing in respect of the increasing burden of data protection, data security and cybercrime legislation that apply to international businesses, and how they are looking to use their data centre strategy to help shape compliance. Keeping key customer data secure is of paramount importance to businesses in the digital age. This is even more complex for organisations operating in regulated sectors (e.g. financial services, pharma, healthcare, aviation, public sector, utilities and defence, etc) and across multiple geographies who have an ever increasing burden of regulation to comply with.

For data centre providers, offering solutions that are regulatory compliant, can be a key factor in driving growth in their markets as it helps to ease the compliance burden for their customers. It is in this space that there is still huge potential for Cloud vendors to better develop their solutions in order to meet the requirements of their regulated customers and unlock greater value from this slice of the market.

Some respondents also pointed to regulatory concerns in terms of investment or operation in an overseas jurisdiction (including from a tax perspective), regulation as to construction of data centres and the myriad of local laws to do with zoning/planning requirements, particularly in respect of data centre build activity.
Many of our data centre operator clients are looking to create a common ‘look and feel’ across their global data centre portfolio. Divergent local law and regulation impacting on data centre design, build and operation does inhibit this however.

Sustainability, Clean-Tech and controlling
energy costs
Despite the current growth in the global data centre market, we anticipate that greener, more efficient facilities may act as a catalyst for expansion. Innovative design and the use of more efficient technology will also enhance development in the sector. Anecdotally this is apparent just from the creative range of buildings that have already been used in recent years to house data centre facilities, such as ex-military bunkers, churches, caves, old shopping malls and even cargo tankers.
An overwhelming 74% of respondents felt that having a recognised sustainability or clean-tech accreditation increased the appeal of a data centre facility. The main drivers for seeking such accreditation were response to customer perception and demand (29%), in response to a company’s own sustainability policy or agenda (27%) and to help achieve long term sustainability (26%). Another key factor cited was trying to tackle the ever-rising energy costs (18% placed this as second most important); power and cooling costs are the single most expensive run cost for data centre facilities.

As identified by the survey respondents, sustainability and green accreditation are gaining increasing prominence. Whilst a more efficient building will result in lower energy costs, the badging of a facility with a recognised accredited scheme such as LEED (US), BREEAM (UK) or other local versions is important for stakeholders such as customers, shareholders and investors.

As mentioned previously (in the impact of Regulation and Legislation section) a lack of a common approach acts as inhibitor or at least a “negative” in terms of data centre expansion. The same applies with green accreditation.

Our clients often seek our advice on the similarities and differences between the various international accreditation systems, in what is a fast-changing and dynamic environment.

New build activity
Most respondents (57%) felt that there would be a slight increase in new build data centre activity in 2014. Specialised co-location providers and specialised hosting services providers/cloud vendors were expected to see the most new build activity in the next 12 months. Some respondents also expect to see some new build activity from very large regulated customers, such as banks and in the public sector.

31% of respondents expect specialised data centre owners and developers to be most active in developing and acquiring assets in the next 12 months. Private equity (PE) is also expected to make a play with 22% of respondents stating that the PE houses would be active in developing and acquiring assets in the data centre sector in the next 12 months. There is also expected to be some activity from specialised real estate investors, and investment banks (18%).

Data security
With businesses producing increasing amounts of confidential information and critical data on a daily basis, data security demands are high on the agenda.

Data security and integrity was identified as one of the main drivers for customers making the decision to use data centre services, with 19% of respondents noting this as the most important factor to consider.
This is not particularly surprising, as for many customers by selecting a specialist third party data centre provider you are simply buying the security of that provider. Similarly, for organisations that tend to build their own data centre, this is often driven by a decision to have a greater level of security and control over their data centre Infrastructure and key customer data.

For many clients in the financial services sector and certain other highly regulated sectors one of the key, reasons why clients build new data centres rather than outsourcing this activity, is due to security concerns particularly in respect of the security and control of their core customer data.

Key drivers for data centre activity
The main drivers for customers to use data centre services as outlined from our survey results are helping to achieve cost savings, security concerns and managing compliance with legislation/ regulation. Other drivers cited include flexibility, developments in technology, increase in digital and mobile business, as well as general economic growth.
Unsurprisingly, cost is one of the most critical factors affecting the adoption, use and purchase of data centres.

Customer organisations seeking to reduce both Opex and Capex costs by outsourcing all (or a critical component) of their data centre operations was another key trend that has emerged.
Finally, it was clear from respondents that flexibility is a major factor affecting the sector – to allow businesses to focus on their core activities (e.g. by outsourcing non-core activities) and to allow for a more flexible approach in terms of data centre usage, which is driven by the demand and needs of the business was of paramount importance.

Clients often look to us to assist in structuring their third party data centre arrangments to provide them with the flexibility that they need to support their rapidly changing business.

Other key global findings
As well as data security and legal regulation being key decision points (as expected), what was particularly interesting to note was that innovation was seen as a key driver when making the decision to use a data centre facility.

What do customers want
We asked respondees to specify what they were looking for from their data centre projects and what their most important business lesson was from the last 12 months.
Based on feedback from the respondents and feedback from our own customer clients, the key drivers for most data centre projects tend to be:
 Achieving significant cost savings (including reducing both
Capex and Opex spend);
 Flexibility/scalability to allow usage based on business demand
or consumption;
 Predictability in terms of price;
 Robust and secure service, including a resilient set of service legal
agreements and remedies for service failures or outages; and
 Ensuring the security, integrity and availability of the data stored.

Conclusion
So what does this all mean for businesses and the data centre sector? The key theme of growth and overall positive outlook that pervades this report is obviously encouraging for the data centre market as a whole. However, what is more interesting is how fragmented the local markets are, and the opportunity that this creates for businesses that understand the local market drivers and are able to leverage this to their advantage (and also a word of warning for companies planning to use the same approach in multiple markets that may be disappointed). This also explains the sense of pessimism in certain domestic markets in Europe, that have had to weather the storm of the recent Eurozone economic problems.

It is positive to see that new players are moving into the data centre investment market (even if this is driven in part by a general sense of lack of opportunity in certain other traditional investment markets) and as this part of the market continues to mature, we will see greater creativity and complexity being used in terms of the investment structures and options available.

Whilst data security and regulatory concerns still pose a headache for many in the global data centre industry, again this is creating opportunity for those that are able to help their customers manage the compliance risk and shape this through their data centre strategy. Also it is encouraging to see that sustainability and clean tech (and the clear impact this can have on rising energy costs) are starting to gain importance on a global stage.

However, the most important “take away” has to be understanding how to cope with technology change and the impact that this is having on the market. We can see that technology change is dramatically changing the way end-consumers use and consume data (and has contributed to the prolific data growth we are seeing), Cloud, Big Data, virtualisation and changes to storage technology are all hugely disruptive and having their own impact on different segments of the market.

Finally, customers now procure data centre services in a very
different way, focusing on flexibility and being “demand driven” (based on business needs) which is requiring traditional data centre players to re-think their approach and leading to the growth of modular and more flexible data centre solutions. Being able to harness the opportunities that technology change is driving will
be absolutely critical to those organisations wanting to benefit from the current growth that the market is seeing and expects to see in 2014.