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June 22, 2023
Data center colocation is in high demand, but providers face high upfront costs and a potentially lengthy wait for return on investment.
Data center colocation is among the most preferred choices among businesses due to cost benefits versus building and managing a private data center facility, according to Grand View Research. In addition, a colocation data center offers better operational flexibility when scaling up infrastructure to accommodate large data volumes.
This is our second annual “CF List” focused on top data center colocation providers. Analysts shared their thoughts on the technology and industry. It includes a new list and fresh views on changes in the competitive landscape.
The global data center colocation market is expected to reach $155.4 billion by 2030, with a compound annual growth rate of 14.2%, according to Grand View Research. The market totaled nearly $55 billion in 2022.
Data center colocation providers are facing additional challenges due to inflation and macroeconomic volatility. For instance, Cyxtera recently filed for chapter 11 bankruptcy. In a bankruptcy document, Cyxtera said it has reached out to potential companies around a potential sale or investment.
“Despite its strong core business performance, [Cyxtera] has recently faced significant headwinds from inflation and macroeconomic volatility, which have driven up interest rates and energy prices,” it said. “As inflation swelled in 2021 and 2022, the Federal Reserve reacted by raising interest rates at the fastest pace in decades. This contributed to the ballooning of Cyxtera’s annualized interest expense on funded debt from $35.9 million in Q1 2022 to $75.7 million in Q1 2023.”
Cyxtera sent us the following statement:
“Cyxtera’s unique global platform of highly interconnected data centers is operating normally as we undertake a financial restructuring process to strengthen our balance sheet, enhance financial flexibility and pursue new opportunities for growth. Our channel partner relationships remain core to our strategy, and we are confident the steps we are taking will make us an even better partner for the long term. We expect to complete this process in the coming months, and our focus remains on providing innovative, high-quality data center services that help organizations transform and scale their businesses.”
Omdia’s Alan Howard
Alan Howard, principal analyst of cloud and colocation service in Omdia’s cloud and data center research practice, said the tricky thing about the data center colocation business is the immense up-front capital investment required to bring a facility to market. (Omdia and Channel Futures are both part of parent company Informa.)
“In most cases, particularly for retail-focused data centers, it can be a lengthy wait to reach a stabilized revenue run-rate and an ideal return on invested capital (ROIC),” he said. “While colocation companies have to be very good at building and operating data centers, it is capital management that keeps them in business, and that means managing the typical debt load required to build data centers.”
The economic environment has had a significant impact on debt management for some companies and raises concerns about debt default, as is the case with Cyxtera, Howard said.
“I can’t speak to exactly why Cyxtera is in this predicament, but for the larger colocation companies in particular, debt management is a long-term and constant process that aims to consistently de-risk the impact of interest rate volatility through various debt instruments and techniques,” he said.
In the meantime, private equity (PE) firms are increasingly recognizing data centers as an attractive asset class. QTS Realty, CyrusOne and Switch were acquired by PE firms and taken private.
“It’s a bit of a complicated story, but as a public company, investor oversight has a bias toward short-term return numbers, which can temper expansion opportunities,” Howard said. “A colocation company owned by a PE firm still has significant oversight from their investors, but there is a longer-term investment return mentality, unlike Wall Street. This has the potential to open up opportunity for longer-term growth strategy as opposed to short-term return demands.”
Forrester’s Abhijlt Sunil
Abhijit Sunil, senior analyst at Forrester, said several data center colocation providers on the CF 20 are listed on the U.S. Environmental Protection Agency’s (EPA) Green Power Partnership National Top 100 list. Using green power helps reduce the environmental impacts of electricity use and supports the development of new renewable generation capacity nationwide, according to the agency.
“We have heard from the sustainability teams of these companies and others in the colocation space about how seriously they’re considering sustainability in their data centers and the services they offer,” Sunil said. “Most of them have strong commitments to sustainability and this trend has accelerated since the pandemic due to a few reasons. First, we have seen multiple commitments that are hard to back out from data center players. Second, the power consumption of data centers is more studied and under scrutiny now than ever before. This especially came under the spotlight during the pandemic when there was an acceleration to cloud models.”
Third, there is increased scrutiny from investors and customers to have their own sustainability goals and want to make sure that the partnerships they make will help them, he said. And finally, there’s increasing power demands from chips in servers especially for running specialized applications such as artificial intelligence (AI).
We’ve compiled a list (in the slideshow above), in no particular order, of 20 top data center colocation providers. The providers are making the most of the ongoing competitive landscape.
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