Analysis Colocation facilities are no longer just a place to drop off a few servers. Many are rapidly becoming full-fledged infrastructure-as-a-service providers as they adopt new consumption-based models and place greater emphasis on advanced networking and connectivity.
But supporting the growing menagerie of value-added services requires a substantial footprint and an even broader customer base, a dynamic that has driven a wave of consolidation across the industry, analysts at Forrester Research and Gartner said. The register.
“You can only provide these value-added services if you’re big enough,” said Glenn O’Donnell, research director at Forrester.
In recent months, this trend has become more widespread, the latest being private equity firm DigitalBridge Investment Management’s takeover of data center provider Switch Inc in a deal valued at $11 billion. dollars.
Switch operates data centers specializing in high-performance infrastructure. The company completed its fifth Prime data center campus in Texas last year, but it is only the latest colo acquisition in recent memory.
“There’s been a bunch of smaller colocation providers that have come together, either being acquired by the big boys or merging,” O’Donnell said.
There has been a flurry of colocation mergers and acquisitions over the past few months. Here’s just a sampling: NorthC acquired Netrics, LightEdge bought NFinit, EdgeConnex got rid of GTN, Unitas Global bought INAP, VPLS nabbed a Carrier-1 data center in Texas, and Digital 9 took over the data centers Finnish Ficolo and Volta in London.
It’s the cloud! Except it’s not either
So what is driving this surge in M&A activity? You might think it’s the cloud, and while there’s certainly some truth to that, O’Donnell says that’s not the whole story.
“I always like to remind people that just because the cloud is so big and growing doesn’t mean the data center is dead,” he said, adding that to some extent the cloud actually pushed people into camps more than it hurt them.
“I won’t give the cloud all the credit, but the cloud has certainly proven that it’s a viable way of doing things,” O’Donnell added.
What the cloud has succeeded in doing is forcing colocation providers to innovate around new consumption models and platform services, while simultaneously expanding their reach closer to the edge.
Major cloud providers operate a relatively small number of extremely large data centers located in major metropolises around the world. In contrast, colocation providers like Equinix and Digital Realty operate hundreds of data centers around the world.
This reach is not only one of the main attractions for colocation providers, said Gartner analyst Matthew Brisse, but it is also proving to be a key driver of M&A activity.
Location, location, location
“Size matters in this industry because customers, especially multinational customers, want data centers in many different locations,” O’Donnell said.
According to Brisse, when companies start considering colocation facilities, their main concern is to spin up workloads in the right place. “The number one reason people go to camps is location, location, location,” he said.
And that demand has only accelerated as colocation providers seek to offer services closer to the edge.
“We’re seeing colocation providers starting to develop their edge offering as opposed to just a hosting experience for your infrastructure,” Brisse said.
They aren’t necessarily large data center facilities in the traditional sense either, he explained. These can be as small as half a shipping container placed at the base of a cell tower.
Smaller regional colocation providers also play an important role because they tend to build in places that big players overlook, Brisse explained.
“A lot of companies don’t have the luxury of sitting right next to an Equinix installation,” he said. “There are many opportunities for the colocation market as a whole.”
And as colocation providers move closer to the edge, Brisse says networking and automation are only becoming more important.
Where Networking Plays In
One of the most powerful added values offered by major colocation providers today is networking.
“When it comes to colocation services, networking services have become a big deal to differentiate them from just a piece of real estate to put your servers on,” O’Donnell said.
And again, the big players have the advantage. “Network connectivity requires a large provider with many sites connected by their own fiber,” he added.
These backbone networks allow workloads running in a data center on one side of the country to communicate with another without ever crossing the open Internet.
But it’s not just the networking between colocation data centers that’s important. Many of these colocation facilities are located directly next to major cloud and software-as-a-service providers.
“So AWS, for example, or Microsoft Azure might be in the same building as you and connecting to it is just connecting to another cage in that same building,” O’Donnell said. “Small players can’t do that, but bigger ones can.”
However, as customers increasingly turn to colocation providers for edge computing and networking, complexity is creeping up, Brisse says.
In the future, “we will have many data centers everywhere; we will have a lot of data distributed in the right place; we will have edge facilities everywhere, bringing data closer to the edge,” he said. . “It will not be possible for humans to monitor all of this activity.”
So, in addition to growing their network footprint and services, Brisse believes colos will also need to invest in AI operations capabilities to manage this complexity.
More consolidation to come
Brisse and O’Donnell expect the colocation market to continue to consolidate as macroeconomic forces put pressure on smaller players.
“If the economic turmoil that we are seeing is persistent, I think we will see an acceleration of this type of [M&A] activity,” O’Donnell said.
It’s important to remember that while colos may look like tech companies on the inside, on the books, they really are real estate investment trusts, he said, adding that in the current economic environment , colos are a relatively safe bet in an otherwise dismal situation. commercial real estate market.
“Colo is a hot market and getting hotter and hotter,” O’Donnell said. ®