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  1. #1
    WHT-BR Top Member
    Data de Ingresso
    Dec 2010

    [EN] Cloud Will Kill the Data Center Market

    In a nutshell, because of their scale, a Google or a Microsoft can develop IT management platforms, buy hardware and land and build data centers at a low cost a typical colo or hosting provider could not get close to, much less maintain a healthy margin. Colo is simply a transitory stage between an enterprise data center and the cloud. But even the orthodox tenet that holds that leasing colo space is cheaper than owning a data center is not true.

    An ‘open letter’ to data center investors

    Zahl Limbuwala
    CEO - Romonet
    October 08, 2014

    I've had too many people ask me to publish this over the past 9 months to not finally take action.

    What I outline here is nothing more than the predicable outcome of a simple economic maturing of an industry that has enjoyed explosive growth over the last decade.

    Those that know me (and my business) know that I’m quietly assisting many of the smarter businesses understand both the macro economic effects in terms of how those impact their businesses, and more importantly, how they can adapt to survive in the coming years as the data center and technology industry go through some major technology driven market corrections.

    This article looks primarily at hosting data centers; some of what I say here applies to the enterprise data center and true Cloud data centers too but I’ll deal with those more specifically in a future article.

    Let's start by dispelling some of the most common myths in this industry.

    Here we go….

    1) Data Centers can’t be valued as a property business (any more)

    Despite what you might believe or been told, for data center providers the dominant cost (from a TCO perspective) in these businesses is not the real-estate.

    It’s actually the capital for the electrical and mechanical equipment and the operational cost for staffing, maintenance, and energy, much of which is too often wasted through poor design and operation.

    What’s worse is that very little of this equipment lasts for the expected 20 year real-estate reinvestment horizon. Much of it needs replacing between 8 to10 years. Even if you got the build 100% right we’ve seen plenty of changes in market demand, so re-investments are necessary to update the asset.

    People will tell you that they are ‘sweating their asset’ which is fine up to the point that the customers’ contracts come up for renewal, and you now have an uncompetitive data center that’s also not fit for purpose compared to all the more recently designed empty new space.

    During the decade of ‘sweating your asset’ the customer’s technology (computing) refresh cycle was only 3 years. So within just one decade their requirements are now three generations ahead of what they were when they first signed their contract. This rate of IT refresh is also increasing; in a few years they may be on very low power servers or asking for direct liquid cooling.

    If your data centers are approaching 10 years old and have not had a major reinvestment you are in for a nasty surprise one way or other!

    2) Data Centers are not "The Cloud"

    The thing I hear all the time is ‘data centers are where the Cloud lives’. Yes, cloud is delivered from data centers but don’t for a moment make the mistake of thinking that this means your data center is now magically worth twice what it was as a plain old ‘hotel for computers’ or even suitable for use as a cloud data center (at what you can afford to charge for it).

    Many data center operators have managed to get vastly inflated valuations by dressing themselves up as a ‘Cloud’ business. Some other businesses have mistakenly paid well the over the odds to acquire them.

    For the avoidance of doubt, Cloud is the commoditization of IT services, nothing more. Commoditization is nothing new; take a look at the airline or shopping mall businesses for a taste of the future margins and problems for data centers.

    3) The Cloud is not your friend it's your competition!

    Very specifically I’m talking about hosting data center businesses here but some of the facts apply to the CIO within an enterprise operator too.

    Every time someone virtualizes a software application (disconnects the sticky link between software and physical hardware) it becomes trivial to move it. That might be move it to new hardware in the same data center or move it out into a pure Cloud data center.

    Discussions of Public vs. Private vs. Hybrid clouds don’t matter here; the underlying economic issue for most data center investors is that the real Cloud providers (Google, Amazon, Microsoft, etc.) have a set of major advantages:

    People scale - they can develop, maintain and operate IT management platforms that would eat your margin if you tried to implement them.
    Physical scale, they buy everything from land to ‘no-brand’ servers and network devices in huge volumes
    Cheap data centers - they are not saddled with ageing “Enterprise Tier III” data centers in expensive locations, they build the cheap cloud data centers out in the wheat belt. It matters which country a cloud data center is in, but not which state or city.

    4) Focus on revenue and growth and it will all be fine

    This is scarily reminiscent of the strategies that many companies followed during the last data center boom; the survivors of that market correction were able to acquire some valuable (and some truly awful) assets for very little money when the bubble burst.

    5) Growth in data centers is a function of the explosive growth in technology, mobile communications, globalization, etc.

    That as a standalone statement is true, but, if you are a colo only data center your share of that market growth is slowing down and from a real estate perspective (total sq. ft.) will eventually start to contract.

    Why? Because the huge demand for colocation space (as it’s called) is a transitional phase in the market evolution, between the old model of enterprises owning everything from the IT staff down to the building, and the new model of buying services from a cloud provider for users to access with their mobile devices. When corporate CFOs decided that owning the data center was a cost risk they could eliminate, but CIOs could still justify owning the servers, software and staff to manage them, we needed somewhere to put all that expensive tin. The same financial decisions which started to kill the enterprise data center now apply to owning the servers, just look at the “Tier 1” server vendors.

    6) My product and my data center business are unique and thus immune to commoditization

    This is a favorite of those in denial! It used to be one of the standard BS bingo phrases, especially on investor calls. For those still in denial, sorry, but for the vast majority of you, the only way your data center is different to anyone else’s is what re-investments are hiding in the closet and how much your margin will drop as those around you get more efficient and your customers wise up to the economic impact of the maturing of this market.

    The decision about where to host your compute will soon be made by a resource broker or a market which has no interest in what your data center looks like, how nice your staff are or anything much else beyond cost, jurisdiction and service level.

    There will be some exceptions to this, there always are. For example some operators have high frequency trading exchanges within their data centers as they are prepared to pay well over market rate to be a few milliseconds closer.

    7) Customers will stay despite the costs because moving is hard and costly

    Yes, moving physical hardware out of one data center and into another is costly, hard and risky. Moving applications (software) from one homogeneous Cloud stack to another (of the same flavor) is not, it can be done literally a few clicks of a mouse.

    In fact, it’s entirely possible for a company to move all their virtualized applications over the network and then have an asset disposal company remove their old compute hardware as it was probably end of life anyway (3 years lifetime remember!) and let then just let the hosting contract expire.

    8) For most customers renting space in a data center is cheaper than owning a data center

    For many customers we, and others, have gone through the economics and the simple fact is that somewhere between 500kW and 1MW of capacity it becomes substantially cheaper (from a TCO perspective) to build your own data center than to rent colo.

    This change has come about due to the commoditization of everything from the mechanical and electrical plant through the design and construction.

    The colo data centers do have some cost benefits due to scale but these are smaller than you think (none of what they buy is high margin so it can’t be discounted much) and they have to build a more expensive data center in a more expensive location than you do or the cloud operator already does.

    As for not wanting to own (then lease it) and operate (then outsource the operations) your own data center once you’re close to 1MW there’s almost no reason not to do so. You can rent the staff and skills from the same people the colo operators do.

    Oh, and if the reason is time-to-market and the long lead time to have your own site(s) built then think again, if the people you’re talking to are beyond the 6-9 months timeframe then stop talking to them. If you need shorter term capacity than this then rent the Infrastructure in somebody else’s cloud until yours is online.

  2. #2
    WHT-BR Top Member
    Data de Ingresso
    Dec 2010

    So what was the point of spewing all that out? To be a sensationalist? To attract attention? To upset people?

    No, the intent was to unveil the economic truth in as stark a way as possible in order to jolt even one or two (if not more) people into taking a moment longer than they would have done before reading this when approached with the next big data center investment business proposition.

    Also to save a few businesses and investors from getting hurt when the endless gravy train they think they are on is derailed. There are areas that are still experiencing (profitable), mostly in emerging markets, however they aren’t immune to commoditization and in fact will just experience it in a much more accelerated way.

    What about these hosting and colo data centers? What should they do?

    Well, it is time to figure out if you should broaden your revenue source, get specialized (and don’t kid yourself on how much specialization opportunity there actually is out there) or sell while the going is still good.

    Whatever your choice, now is the time to look closely at minimizing cost and maximizing margin, being realistic about the reinvestment's you need to make versus the risk of not making them. Then at least you give yourself some time to think, decide what outcome you want and how you’re going to get there.

  3. #3
    WHT-BR Top Member
    Data de Ingresso
    Dec 2010

    Understanding TCO and the Cost of Delivering a Service

    Throughout the history of the data center, understanding the true costs behind the technology has been an uphill struggle.

    Recently, eBay and Facebook announced that they are taking steps to understand data center cost and efficiency. And while this proves that the struggle is gaining momentum, it doesn’t mean much to the average data center owner who can’t command the budget to take similar steps.

    That said, unless organizations of all sizes and at all levels understand the Total Cost of Ownership (TCO) of their IT estate, they cannot begin to understand the real costs of delivering a service.

    Key factors that must be taken into consideration

    The increasing demand for IT, whether for business or consumer services, has resulted in more and more data centers springing up worldwide. However, a number of factors are combining into a single tipping point that could undermine these services.

    First, IT services are increasingly seen as a commodity, meaning that users expect much the same costs regardless of who provides the service. Second, IT budgets are coming under greater scrutiny, meaning that IT departments need to justify more and more of their expenditure to the CFO. Finally, the pace of technological change has been so rapid that the demands placed on data centers themselves have changed. This means that continual investment is needed to guarantee performance.

    Without understanding these factors, data center owners will be unable to ensure that they can justify and use the IT resources at their disposal.

    Understanding the contribution from IT

    An increased reliance on IT means additional investment in energy, storage and the necessary skills to ensure everything is running smoothly. It also means that IT is taking up more of the budget.

    In general this would be fine, however, most organizations are unable to precisely identify exactly what business activities IT spending supports. As long as the company as a whole is profitable, most see no need to identify which of their IT services are consuming the most resources and where money could be better allocated.

    Other areas of the business are beginning to take note of this. One recent trend we have seen is that facilities departments are no longer willing to support the IT infrastructure and are asking for power consumption in data centers to be allocated to the IT budget.

    Essentially, data center and IT spend can no longer be seen as a single monolithic cost that is separate from the rest of the organization. Instead, it needs to be an integral part of the overall budget and strategy.

    Ensuring profitable growth for all

    Understanding the TCO of a data center and how each service operating from there contributes to this, is key to ensuring that the business runs profitably as a whole. This is only in this way that businesses can truly understand the cost of delivering a service.

    The sad fact is that data center owners have no easy way of predicting the costs of their data center, since they can only go by historic data gained after the fact.

    While measurements like Power Usage Effectiveness (PuE) and other data from metering have helped data center operators understand efficiency, they give no real understanding on how this relates to TCO. Without aligning data center cost and efficiency to the goals of the business then measurement is useless on its own.

    This is particularly true when data center owners are considering expanding or modernizing existing operations. The IT department has to justify new spend to a CFO, who may well be sceptical thanks to previous projections falling short of the mark and eroding confidence in any Return On Investment.

    The problem is that without the right tools, accurate prediction is impossible, meaning organizations have no idea how a data center will perform until they have already built it. Numerous factors need to be considered such as ambient temperature, the distance to the local power supply, energy costs, taxes, data center design, and the hardware running inside. For example, a data center being built in Norway will have wildly different factors influencing its TCO than one built in Texas.

    Eliminating the uncertainty

    Data center owners and managers must be able to accurately predict performance of data centers to justify any future financial decisions. This is where predictive modelling comes in.

    While organizations can measure how data centers are performing based on factors such as ambient temperature, data center design, cooling, and so on, predictive modelling is more concerned with how data centers ‘should’ be performing. By modelling data center performance based on these variables, organizations can understand how current performance stands in relation to the goals of their business and what they need to do to gain the most from their investment. Organizations can also predict the performance of data centers while they are still on the drawing board and say with certainty how much it will cost the business to operate, before they have allocated budget or committed to any construction.

    To get long-term value out of IT investments, businesses need to optimize all aspects of the data center estate. By understanding how the full architecture operates, data center owners and operators can predict the actual cost of IT decisions and eliminate uncertainty in the process.

    The data center of the future

    With the right tools organizations can identify where further energy savings can be made, predict performance based on real data, and understand the real costs of delivering a service.

    Real understanding of TCO cannot be achieved by reactive methods. Organizations need to take proactive steps toward understanding the cost of operating their data centers and how this relates to TCO.

    As the commoditization of IT continues and the data center market inevitably follows the same path, the ones that survive will be the ones that understand how their investment decisions will impact on the wider business and which ones will come to fruition to bring them success in the future.

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