Update: 2020 Trends in Datacenter Services & Infrastructure
July 16 2020
by Kelly Morgan, Penny Jones
The coronavirus outbreak has rapidly shifted global markets, including those related to enterprise technology, since we published our 2020 Trends report on Datacenter Services & Infrastructure in December 2019. This report serves as an update to our 2020 predictions in light of market changes due to COVID-19.
The 451 Take
Datacenters are expected to stay up and running, no matter what happens. Facility managers have plans and processes in place to respond to everything from natural disasters to terrorist attacks. Though providers couldn't necessarily anticipate the ongoing global pandemic and its wide-ranging impacts on society, many have had to deal with major increases in service requirements before – during the recession of 2007-2008, for example, when more people spent time at home streaming content and doing online shopping. Providers learned about resiliency and the importance of communicating with transparency during such events as the Tohoku earthquake and tsunami in Japan in 2011 and Hurricane Sandy in New York in 2012. COVID-19 adds some new elements to these challenges – especially around staffing, supply chains and access, as cities go into lockdown. Build and customer pipelines are likely to suffer short-term impacts. Still, most datacenter providers have successfully minimized the impact of the COVID-19 crisis on their business so far and are quickly adapting protocols and procedures to accommodate what will likely become a 'new normal'. Post COVID-19, we expect demand for leased datacenters overall to rise, as cloud growth translates into datacenter requirements and as enterprises start factoring pandemic preparedness into future business continuity strategies.
451 Research's Q4 view of the market – what we said
2020 Trends in Datacenter Services & Infrastructure, as of December 2019
451 Research, 2019
Our updated evaluation of each trend follows
As we have noted before, the leased datacenter model offers a place where infrastructure and services combine to better deliver applications and content by improving performance, bandwidth cost and latency. These benefits have only become more important following the lockdowns resulting from COVID-19 and the need for video and other applications to work smoothly from home offices. Enterprises that previously did not see a need to improve networks may now be open to new approaches and ready to try network hubs. In addition, some managed service, SaaS and other IT firms have turned to public cloud providers for additional capacity as new server deliveries have been delayed by COVID-19. This is placing an increased focus on datacenters that can offer direct connections to the cloud with private on-ramps.
Even datacenters that are not interconnect hubs per se have seen rising requests for remote hands, along with inquiries for disaster recovery services. If datacenter firms can provide remote hands services well, enterprises may look to move more workloads to datacenters offering these options, as they aim to trim staff costs and move to success-based operating expenditures. Currently, many providers are offering remote hands at low or no cost to keep customers from entering the facilities, so these services may not translate to immediate revenue. However, we expect that customers will find these services helpful and this will lead to stronger demand for space and power down the line as such providers become more integral partners. This does highlight an even greater need for those providers to ensure that they have the right skills in place. Some enterprises have had to accelerate their plans to migrate to cloud platforms, but this has exposed weaknesses in their in-house teams in terms of being able to support and manage the process. Datacenter providers are among those that enterprises turn to for help, but they may be experiencing similar problems. They will need to add staff or partner with other service providers to better address these customer requirements. Finally, there has been a rise in the use of customer monitoring platforms. Customers want to know what is going on with their equipment at all times. This service was largely overlooked when customers could send staff into the datacenter but may well become more of a differentiator for datacenter providers going forward.
In 451 Research's annual Datacenters survey, disaster recovery has consistently been cited by enterprises as a key reason to rent colocation space. In the 2019 survey, 53% of respondents note it as a reason for renting space. We typically see increased demand for leased datacenter space following local events such as fires, hurricanes or floods. The COVID-19 pandemic has had a much broader impact than location-specific events, but we believe that many enterprises are re-evaluating overall disaster recovery plans as part of their response to the crisis. Providers have reported strong interest in disaster recovery space following the onset of the crisis, and we expect to see this boost demand for leased datacenter space longer-term, especially for players whose backup infrastructures can contend with increasingly complex hybrid cloud environments.
Regarding wholesale datacenters, cloud providers and IT firms have been the main customers of these sites. Many are reporting an uptick in demand for their services, which we believe will translate to increased demand for leased datacenter space, particularly in locations where cloud providers need to add capacity quickly due to current space filling up or in new locations to address latency and data sovereignty requirements.
One immediate impact has been the dramatic slow-down in sales processes for datacenter space, due to travel bans from both government bodies and corporations. Datacenter tours and face-to-face meetings were canceled around the world starting in February in many areas. The lack of in-person meetings has frustrated the normal sales cycle, but has also led to innovation, as datacenter providers virtualized datacenter tours. This may add a quarter's delay to the typical sales cycle, though we have heard from many providers that demand has strengthened since March or April, so sales may not actually decline over the course of the year as the industry digests pent-up demand. It may also depend on deal size: We have heard from some providers that sales cycles have decreased on smaller deals (one to three cabinets), with most customers signing in three weeks or less from first contact – many without ever having stepped foot in the facility. However, sales have slowed for bigger deals from 5-50 cabinets since presumably customers want to tour the facility in person; it has also been a challenge to get equipment in that quantity and send staff to install it, so those deployments have been delayed.
The datacenter industry is grappling with constraints placed on construction activity as well as some potential supply chain concerns due to factory closures in Europe and China. This could lead to construction delays and reduced supply of datacenter space in some areas. In the US, this has varied depending on each state's approach. In Europe, some governments placed datacenters on their list of mission-critical facilities for the first time, allowing staff to be classed as 'key workers' and enabling continued construction as well as freedom of movement to and between sites for operational purposes. In Asia, many of the stay-at-home orders have been stricter. We anticipate that datacenter builds that were not in the last stages of rollout will be delayed by at least a quarter, if not more. In emerging markets in Africa and the Middle East, providers we have spoken with regard the delays caused by COVID-19 as a 'bump in the road' rather than an out-and-out roadblock. And as seen in some Asian markets, they face delays of a few months rather than a year or more. Where some have been caught is in their choice of using a prefabricated, modular approach to construction. This type of construction has typically been used to speed the build process but, ironically, has now had the opposite effect. Due to the pandemic, modular factories in Europe and elsewhere have shut down, leaving orders unfulfilled. Even where equipment and parts have made it out of the factory, shipping delays and prolonged logistics processes have meant products are sitting in portside warehouses. In other areas, such as Australia, non-modular construction has been delayed by construction and other unions setting up increased safety parameters around workers returning to sites. Social distancing, limited hours, more breaks, fresh air requirements, enhanced PPE and sanitized facilities can add to the timelines for construction.
The coronavirus has had a clear impact on the global economy, and we have seen M&A deals overall dwindle as the virus disrupts regular business activities. However, in March, Digital Realty was able to close on its $7.3bn acquisition of pan-European retail colocation provider Interxion. The acquisition provides Digital Realty with 53 carrier-neutral facilities in 11 European countries and 13 city markets, and great growth potential with most locations offering room to grow or access to land parcels. Following the takeover of Interxion, we saw US-based Vantage Data Centers enter the European market with its acquisition of modular datacenter provider Etix Everywhere, which has a large site in Frankfurt it is developing as well as a number of single-tenanted 'edge' sites in secondary markets, and its acquisition of Next Generation Datacenters (NGD) in Wales. There still seems to be strong interest in datacenters as safe-haven investments as well as operationally strategic bolt-on assets and we believe new targets will arise – many of which will be in secondary markets as companies find more reasons to enact edge strategies and add more localized IT environments. As a result, datacenters could well be one of the stronger acquisition and investment sectors over the next few months.
As we noted above, connectivity-rich sites have seen strong demand, particularly for direct connectivity options into cloud and remote working tools, as enterprises look to increase security and speed for remote working services. Internet exchanges have noted record gigabits of demand. However, content providers such as Netflix that have been heavily dependent on interconnect centers in major cities are now also looking at edge deployments, evaluating carrier hotels and exchanges in smaller cities. The pandemic halted the delivery of servers and IT equipment for many of these firms early on, while site restrictions made it difficult for staff to enter datacenters to install gear, so it has been challenging for content providers to deploy at new edge sites. However, we believe many of these smaller datacenter markets will now be part of strategic expansions sooner than previously thought.
On the downside, retail datacenter providers in 'edge'-type smaller cities whose customers currently are mainly local businesses could be challenged by COVID-19. They could lose customers that don't survive the economic downturn, though that may be offset somewhat by increased demand for services, as mentioned above, and by content delivery networks seeking more 'edge' space. Still, we may see a bit of a dry spell for some of these emerging market datacenter providers.
One of the drivers for datacenter technology evolution has been the increase in density per rack – higher-density racks are preferable for data analytics and processing applications as well as other workloads requiring certain chipsets. Respondents to our Digital Pulse survey rated data and analytics as the highest-priority technology for both 2018 and 2019, while data and analytics and machine learning/AI are respectively rated as the number one and two technologies with the greatest game-changing potential in 2020. While spending on new analytics projects could be delayed in the short term due to COVID-19, enterprises and governments are turning to this field to understand the impact of the current disruption on employees, customers and supply chain partners. We believe the growth of advanced data analytics will continue to put pressure on current datacenters due to density requirements, leading to demand for more advanced datacenters as well as for technology, such as liquid cooling, that can address the cooling needs of higher-density racks. Implementation of these technological advances may be delayed this year due to COVID, but we believe we will see even stronger demand in the medium to long term as the environment normalizes.
Finally, many providers have used this time to rework and upgrade their service platforms to give customers even more visibility into the equipment and datacenter. Some have upgraded security, reporting capabilities and compliance reports (such as documentation that validates the provider's PCI compliance or HIPAA compliance); added RFID tagging to customer cages and equipment so alerts go off if the equipment leaves the site; and reworked the interface so that customers are more comfortable using it. Some providers added the ability to integrate the data into the customer's own building management systems so that they can look at their environments in one location. Some have simply offered additional visibility into the status of providers' equipment – e.g., how efficiently it's running, if there are any planned maintenance tasks. COVID-19 may lead to increased innovation and improvements in datacenter operations software.