Introduction

With growing requirements for cloud services, as well as the storage and processing of data, 2020 ushers in a year of ever-increasing demand across the global services and multi-tenant datacenter (MTDC) industry. Meeting this demand is becoming increasingly complex as customers – no longer content with low-risk supply that matches requirements for connectivity and power with the right proximity advantages – start requiring conversations to shift from datacenter supply to business benefits.

This means that clients (and investors) in 2020 expect datacenters, despite being complex, multimillion-dollar projects, to be built in ever-shorter time frames, at ever-lower cost, and with more bells and whistles, all the while catering to technologies that have not even been invented yet.

Datacenter vendors and service providers are responding to the challenge by factoring in everything from climate concerns to 'edge' or proximity needs, and are adopting new business models and technological approaches. Those that can't are providing ample opportunities for those interested in M&A activity. (A more detailed view on the trends expected to shape the industry through 2020 can be seen in 2020 Trends in Datacenter Services & Infrastructure.)

The 451 Take

It used to be enough to have a datacenter near a city hub with connectivity across and out of the market, an interconnection platform offering access to services and carriers, the right security, power, certifications and efficiency measures, and favorable T&Cs and pricing. If 2019 taught us anything, it is that these things are now not enough. The industry has seen the hyperscalers move in (some of the most discerning of buyers that require fast time to market, even lower costs, and increasing levels of flexibility in terms of design). Managed service providers have followed, bringing with them their own set of complex needs along with a new wave of enterprise demand – fueled by the need to tap into these new service environments. As colocation becomes the obvious vehicle for connecting enterprises, service providers and cloud platforms, the industry is being called upon to also meet new needs for data-intensive applications from AI to IoT, which are pushing requirements further toward the edge.


Year in Review

MTDC providers have spent the last few years working out ways to accommodate hyperscale cloud firms, and attract a service provider ecosystem that will help generate hyperscale demand. This has meant building datacenters to hyperscaler and service provider requirements, expanding to new locations, and enhancing local and international connectivity options.

Many providers have launched platforms for on-demand access to networks, as well as ticketing systems for remote hands and services such as private clouds. The focus has been on enabling seamless 'invisible' migration across facilities, and providing simpler ways to access partner ecosystems. This has resonated well with IT service providers and cloud firms, many of which are choosing to use colocation as a way to quickly roll out new services in an increasing number of locations.

On the technical side, the MTDC industry has been looking to cater to new demand arising from the maturing of technologies such as AI and IoT, as network, cloud and service providers increasingly push their capabilities out to the edge. As a result, we have witnessed wholesale providers adopting retail colocation models, and retail colocation providers allowing for wholesale supply. We have also seen some providers offer services further up the stack to enable faster time to market in new locations or edge sites (a concept that started to become a reality in 2019 as 5G trials got underway in many major markets).

Enterprises are now realizing the value that comes with having so many integral services located with the one provider, or in the one datacenter, and are increasingly considering colocation as a way to access multi-services and multicloud architectures. These dynamics (cloud, service provider and enterprise demand) have captured the interest of investment funds and private equity firms seeking alternatives to traditional real estate assets.

Meanwhile, how we build datacenters has also been changing. Advances – including the growing use of prefabrication for turnkey datacenters, micro-modular facilities, electrical components and packaged cooling systems – have continued to shape the industry, especially where fast time to market is of paramount importance. As a result, the supply chain for datacenter build and operation has become more predictable and rapid, and has led to better cost control.

Movements such as Extinction Rebellion, and events such as the Australian bushfires, have also created a renewed focus on energy-efficiency measures for datacenter operators and customers alike. We expect to see conversations around environmentally friendly technologies and emissions, and access to renewable energy, to be pushed higher on the agenda through 2020 as a result of a growing global awareness around the energy consumption of the datacenter industry, and the increasing challenges faced by the natural world.

Research Findings

The global MTDC market reached record levels of growth through 2019, with a Q3 Q on Q CAGR of 10.7% (up from 8.3% in 2018). Growth was seen across all major markets, and slightly more across APAC than other locations. The market currently offers around 187 million square feet and 24,348 megawatts of operational supply, and we predict this will grow to at least 188 million square feet and 26,004 megawatts by Q3 2020.



In most leading markets today, the lion's share of demand is being seen from the hyperscaler and service provider communities. Providers, however, are now preparing for a new wave of demand from the enterprise segment. 451 Research's Voice of the Enterprise (VotE): Datacenters 2019 survey highlights the opportunity from this market (see Figure 2).

It found that just over 63% of enterprises still own and operate datacenter facilities. Of these, 36% expect to increase the amount of rack space they own or lease in the next two years, as facilities age and new applications boost performance and density requirements. Many expect to leverage third-party/colocation sites. Disaster recovery remains one of the main reasons for enterprises to leverage colocation, but organizations are realizing that datacenter providers can help link cloud, connectivity and services.

In the same survey, respondents say interconnection and access to the cloud are now more important than remote hands when they choose a provider, highlighting the strategic role MTDC facilities are seen to play in enterprise IT architecture deployments



Datacenter builds and services have also been evolving. The edge is just one example of a technology that is leading providers to explore new formats and operational models for datacenters. Much of the focus for the edge remains around IoT capabilities, but constraints across the network are now driving edge conversations for media, content and the cloud.

IoT is a great bellwether for edge deployments because of the technology's reliance on low-latency network options. In 451 Research's most recent Voice of the Enterprise: Internet of Things, Vendor Evaluations 2019 survey, most enterprises said they gather data from some form of equipment or device (see Figure 3). Around 35% say they are already using IoT as part of these efforts, and around 23% plan to implement IoT in the next 12 months.




Technology – Catering to the Big, Small and the Nimble

Throughout 2020, many MTDC providers (along with service and cloud providers) will focus on how to make the datacenter more 'invisible' to meet the requirements of enterprise IT customers. Businesses that leverage a multi-tenant architecture will tend to be less concerned about the underlying systems delivering their services than the seamless way they can connect to complex services and solutions. Some business applications will be cloud-native, others will not, some will require an emphasis on location or certification, others will be governed by budget and services. Many will need to talk to one another.

Enterprises will be weighing options as they determine best execution venues and how to move to hybrid clouds with a particular business outcome in mind. Providers are likely to first focus on enabling seamless migration across environments, which will be promoted as a business outcome. Colocation providers that undergo this metamorphosis will lay the foundation for their own value as strategic integrators of cloud and services, and as the meeting point for customers and services.

Catering for the Edge and the Cloud

New datacenter infrastructure models and connectivity options will also be realized as the edge becomes more than just a concept, but don't expect the frontier to be conquered. Conversations around what companies will own and deliver at the edge will progress through 2020, with incumbent carriers, opportunistic enterprise fiber providers, real estate holders and retail colocation firms all investigating what these new opportunities could mean.

The service offerings they deliver may focus on real estate options, or technology integrations (for example, leveraging third-party locations for the provision of small IT stacks) and connectivity needs (even into the on-premises environment). Most will require management through a connectivity or IoT platform. Many will require infrastructure investments that could again create confusion over the pedigree of certain markets (e.g., colocation to service provider, colocation to fiber provider, fiber provider to service provider).

As a part of this new focus on the edge, there will be demand for smaller edge datacenters related to 5G and IoT deployments. This could lead to the growth of facilities that are not 'traditional' datacenters. Some, such as smart buildings and factories, may support megawatts of IT capacity, be heavily connected, and require multiple power distribution and storage systems. Others, such as distributed micro-datacenters (e.g., at cell towers) may support less than 100kW of capacity, but be managed centrally using advanced software.

At the other end of the spectrum, cloud providers will continue drive demand for large, high-density datacenters in low-cost locations, as well as for network-dense connectivity facilities.


A New Era for Datacenter Builds

The edge and the cloud both introduce new datacenter design and operations challenges. There is now a requirement to build faster with lower costs, to operate more efficiently, and stay up and running without keeping extra equipment on standby. All this while the IT equipment inside the datacenter undergoes rapid changes – and, in many cases, uses more power in a smaller footprint.

Providers that can adopt innovations such as data analytics, management software, multisite resiliency, prefabrication, liquid cooling and open source architectures in order to create intelligent, connected and flexible buildings will respond more rapidly and successfully to technical change and customer requirements.

As a result, technologies such as DCIM and datacenter management as a service will continue to advance, and be more widely deployed as providers look to improve efficiency, prevent outages and lower maintenance costs (and in 2020, extracting data for machine and deep learning models to extract more value from operations data).

The datacenter industry will also require a broader vision around environmental responsibility, including how to retrofit older sites, reduce power and water consumption, and how to source renewable energy. In addition, operators will need to plan for environmental change: warmer temperatures outside, greater natural disaster risk, changes in water availability, as well as shifting customer and regulatory requirements. Engineering based on historical worst-case climatic conditions will not be enough in the future.


A Shifting Market Landscape

Investors have witnessed spectacular growth of the hyperscale cloud market across existing markets and into new territories. They are also now witnessing the new wave of enterprise demand. These dynamics have captured the interest of investment funds and private equity firms seeking alternatives to traditional real estate assets, many of which are starting to realize the increasing value the datacenter industry plays in the technology space, and how datacenters are essential to the delivery of new technologies.

As they become more comfortable with the industry, investors that were once seeking short-term options across the market are now looking beyond a six-year investment schedule, creating deep pools for expansion and market growth, and allowing new MTDC providers to get a foothold in their markets.

High capital outlays and the need to tap into service ecosystems or gain geographic reach means such investments are welcome by the industry, but as new investors enter the sector with long-term holding plans and a tolerance for lower returns, the prices paid for acquisitions are rising. The result is a new asset class, a building boom with well-funded providers, and an increasing number of investors keen to put money into the sector. As more investors enter the game, the pool of providers available for acquisition, however, is starting to shrink.

The industry has also seen heightened activity for organic M&A activity, which has created large shifts in the provider landscape. We expect the mix of providers globally, regionally and locally to continue to change, along with those that invest in the industry. We expect an increase in acquisitions across most major markets for the next two years, but a scarcity of supply could shift the emphasis over time into emerging markets. Innovations around raising and spending capital (such as joint ventures, and selling stabilized assets to longer-term investors) will increasingly differentiate successful providers.


Conclusion

Looking beyond 2020, continued adoption of the cloud, the rise of IoT, and the massive amounts of data to be created, processed and stored will continue to create demand for datacenter space, datacenter suppliers, and service and network providers. There will be opportunity for multiple providers offering various options.

There will also be more M&A activity, but opportunity across many more geographies. And although the need for datacenters will remain strong, what makes a good datacenter location may change, and providers will be under pressure to continue to build quickly, while reducing costs and trying to differentiate themselves. Technology will also evolve, and put pressure on legacy datacenters. Providers that can innovate (around technology as well as capital raising) and those that have the scale to spread risk and reduce cost will have an advantage.
Penny Jones
Research Director - MTDC & Managed Services

Penny Jones is a Research Director for the Multi-Tenant Datacenter channel and the Managed Services & Hosting channel. Penny provides insight into the European multi-tenant datacenter markets; European managed services and hosting markets; and European cloud (IaaS, PaaS & SaaS) markets.

Jeremy Korn
Research Associate

Jeremy Korn is a Research Associate at 451 Research. He graduated from Brown University with a BA in Biology and East Asian Studies and received a MA in East Asian Studies from Harvard University, where he employed quantitative and qualitative methodologies to study the Chinese film industry.

Aaron Sherrill
Senior Analyst

Aaron Sherrill is a Senior Analyst for 451 Research covering emerging trends, innovation and disruption in the Managed Services and Managed Security Services sectors. Aaron has 20+ years of experience across several industries including serving in IT management for the Federal Bureau of Investigation.

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