November 13, 2013
Let’s face it. Our sector (wholesale and retail datacenter) has been getting hammered lately in the public markets. A lot of people have been asking me why. I have a pretty simple take on the state of our industry. To put it simply, we are in our angst filled teenage years. Let’s take a stroll down nostalgia lane to see what I mean.
Birth and Infancy (a breech birth)
The industry rose from the ashes of the dotcom and telecom busts in the late 90s and early 00s. Those of us in it back then (2001-2005) found assets for pennies on the dollar. While the dotcom lemmings were running off the cliff of “Get Me the Hell Outtahere”, there were a brave (some may have used a different word here) few that put their hard earned cash to use buying assets out of bankruptcy from the likes of Exodus, Enron and 365 Networks. Even Equinix was getting lifelines from Singapore. At this point in time, few large enterprises even thought about outsourcing core functions to these data center mavericks. If their servers didn’t need a lot of bandwidth, they sat in the corporate datacenter that had been serving the company since its first mainframe. Deals in these early day involved a lot of Meet-Me-Room development and generally relied upon local loop bypass to fill up a colocation space. After all, co-locate was a term from the CLEC days on the late 90s. We just took it to a new level.
Toddlers (learning to speak the language)
The Internet boom really started to put these older assets to work. They filled up. Quickly. Suddenly in the mid-2000s, tiny companies like Google, Yahoo and Amazon had become big companies. And they were taking up space fast. It was around this time that the industry shifted from $/sf to $/kW as the standard unit of measurement. This $/kW shift occurred rather quickly since the industry was now building new facilities instead of taking over and upgrading discounted assets. I remember the discussions in my days at Digital of trying to explain why it made for more accurate metrics using $/kW (for my real estate friends there, it was not a simple transition). But by the end of 2006, most of the “sophisticated” folks in the industry used $/kW for builds. Cabinet pricing was (and generally still is) inclusive of the power circuits, but from a wholesale perspective, metering of power started to become the norm.
Elementary School (everybody gets a trophy)
At this point in time (2006-2008), the global boom from housing was in full effect and companies, especially those providing financial services, were growing their IT needs rapidly, especially financial services. The financial services industry was the first main, non-Internet/Content/Telco vertical to recognize that the outsourced data centers could meet their needs. For data center providers, this was a boon; if the likes of JP Morgan Chase and Morgan Stanley could outsource, most Fortune 2000 CIOs could make the same decision without the threat of the gallows. We all grew up really fast. We made a lot of mistakes (mostly by not be as efficient with our capital or operating expenses as we could be). Skinning your knees in fourth grade is not a big deal. A few tears, some Neosporin, and presto – all better! Hell, in retrospect it was hard to make bad investments as demand outstripped supply. Back then; markets like Northern Virginia were still “emerging”. Good times indeed.
Middle School (the first cliques and real bullies)
Then it happened. We had to change schools. Dad moved the family – to the recession. 2008-2010. The preteen years. This was the first cleansing cycle. Some friends grew, others didn’t. A few got beat up (not enough lunch money- DuPont), while others joined the stud jock clique (plenty of lunch money – Digital). Generally speaking though, it wasn’t much fun for anyone.
High School (where we are today)
The great thing about high school is that this is the age that you think that you know more than your parents. In our industry’s case, our parents are other, more mature industries. We are an industry that requires capital to grow. Therefore, our predominant metric is return on capital. We provide a service to other industries. We give them infrastructure that is generally better and more cost effective than what they could do themselves. That said there are still plenty of datacenter companies that rely on being the only girl at the dance of a small high school. The fact that you are popular may have more to do with the 20-to-1 ratio of boys to girls rather than the fact that you are smoking hot and have a great personality (as if the hot girl even needed one). In other words, just because you have been successful as the only provider in town does not make you a great provider. It does make you a great opportunist. As we continue to look at our industry’s prospects, we can be heartened by the fact that most other industries have also gone through a similar maturation cycle. For example, we just had our first organic company achieve the multi-billion dollar revenue mark not too long ago (Equinix). They are kind of like the “Fonzie” of our industry. Everybody likes them, and justifiably so. (as a quick aside, no, I do not think that they will be jumping the shark anytime soon).
The Future (the college years)
So what do our next few years hold for us? I think that a lot us will be continuing to mature in different ways. All of us will all need to pick our major carefully about what we want to be tomorrow. It is through differentiation, not a “me too” mentality that tomorrow’s stars will emerge. Differentiation by vertical, by service offering, by size of customer served, by market, by high-touch versus no-frills, by commoditized versus custom. Different business models on the back end with different products for different segments of the market. Based on these decisions, some of the current industry studs will become even studlier. Others will turn into your chronically unemployed Uncle Phil. The key to success will be having great management, strategy and execution. As a matter of fact, as our industry matures, the real players will be successful the same way that every other industry titan has – by having the ability, the passion and the opportunity to excel. Our industry just got its college acceptance letter. We are picking majors, deciding if we want to go Greek or not, and, if I’m right, attending our history class so that we can copy the successful paths and not make the same mistakes of those that were before us.