Wholesale, Colo Players Compete on More Deals

365main-sanfran

The 365 Main colocation center in San Francisco, which is now owned by Digital Realty Trust.

Sellers of wholesale data center space are increasingly competing with colocation providers on deals in some major markets, according to company executives in both sectors. As cost-conscious customers consider a wider range of options for their IT operations, some wholesale providers are targeting smaller deals that traditionally have been prime candidates for colocation.

Meanwhile, the largest player in the wholesale space, Digital Realty Trust, has become a major player in the San Francisco colocation market with its recent purchase of the 365 Main data center.

Wholesale vs. Colocation
In the wholesale data center model, a tenant leases a dedicated, fully-built data center space. In colocation, a customer leases a smaller chunk of space within a data center, usually in a caged-off area or within a cabinet or rack.    

The wholesale data center model offers greater control and security than shared colocation space, but it’s not a fit for everyone. The economics of wholesale space have historically been most attractive to companies requiring at least 1 megawatt of power capacity for their data center. 

But this year wholesale suppliers have been competing for deals of 500 kilowatts and below. 

"We are starting to see a little more pressure on the rates from the wholesale players," said Steve Smith, the CEO of Equinix, the largest colocation specialist. "In some deals, we see them coming down into the 250 to 300 kilowatt range, below that half a megawatt range.

Some Pricing Pressure
"I wouldn't say it's an across-the-board trend, but we're starting to see them dip into a little bit smaller deals," Smith added. "So yes, there’s pricing pressure there. Lots of times we walk away from it, but if it's a strategic customer, we might get a little more aggressive."

Hossein Fateh, the president and CEO of wholesale data center provider DuPont Fabros Technology, says his company is indeed pitching smaller deals than it has in the past.

"I think the reason the market is becoming more competitive for the retail (colocation) players is because some of the wholesale players have decided to compete in the half a megawatt market and make it wholesale," Fateh said in a recent conference call with analysts. "That's why the retail players are feeling it."

Partitioning for Smaller Deals 
Wholesale providers standardize their data center designs, building out "pods" of completed raised-floor space. DuPont Fabros builds most of its pods to support 2.2 megawatts of critical load, but also offers a 1.1 megawatt pod size. Those spaces can be partitioned for smaller deals, a strategy DuPont Fabros is pursuing with its new facility in New Jersey.       

"Now we would easily do half a megawatt deals," Fateh said. "It diversifies tenant space, and I'd like to have more tenants per building. We're still getting our rents and we're still getting the returns we want."

The emergence of cloud computing services adds further complexity to the mix, Fateh says. Some customers with 500 kilowatt requirements might now consider a cloud provider. Meanwhile, cloud providers are a key customer class for both colocation and wholesale providers.

Some Compete in Both Sectors
A number of companies offer both colocation and wholesale space, including QTS, CoreSite and i/o Data Centers. That group recently expanded as Digital Realty Trust acquired the 365 Main portfolio from Rockwood Capital. While most of the portfolio consists of wholesale space, the 365 Main San Francisco facility offers retail colocation services.

"We'll continue to operate the colo business at the 365 Main building in San Francisco," said Digital Realty CEO Mike Foust. "I think between that and the Oakland building and 200 Paul, we can really be the dominant colo provider in the San Francisco market."

Foust quickly added, however, that Digital Realty is "not pursuing colo as a strategy in other markets."

On the recent Equinix earnings call, securities analysts asked whether the company had considered diversifying beyond its colocation business. 

"Are we thinking about figuring how to get into that (wholesale) space today?" Smith said. "No, we don't really need to. We're very comfortable today staying focused on these (colocation) ecosystems and continuing to grow them and occasionally do an anchor-like deal."