Telx Acquisition Closed, Here’s Digital Realty’s Plan

While some of the world’s biggest cloud data centers were designed and built by the cloud providers themselves – companies like Amazon, Microsoft, and Google – they represent only a part of the picture. A lot of the world’s cloud capacity lives in facilities cloud companies lease in big chunks from wholesale data center providers, such as CoreSite, DuPont Fabros, and Digital Realty Trust.

Now that its $1.9 billion acquisition of Telx is closed, Digital hopes it can make its facilities more attractive for companies like that. San Francisco-based Digital already provides space to the likes of IBM SoftLayer, CenturyLink, Amazon, and Oracle, but the acquisition gave it control of Telx meet-me rooms, where lots of players in the cloud and network services ecosystem interconnect. Interconnecting those meet-me rooms with its big wholesale facilities over private network links is Digital’s new value proposition.

Combining access to rich interconnection environments with large chunks of data center capacity is something the world’s largest data center interconnection broker, Equinix, has not been interested in providing, according to Chris Sharp, who recently joined Digital as CTO after two years at the helm of Equinix’s cloud interconnection business.

“It’s not in Equinix’s interest to go after that larger footprint,” Sharp said in an interview with Data Center Knowledge. Equinix has a different business model, centered on high-margin retail colocation and interconnection services. “There’s only a few select providers, such as Digital Realty, that are able to fulfill [wholesale data center capacity requirements].”

In developing its interconnection play, Digital has a delicate balance to uphold, since Equinix happens to be one of its biggest customers. Scott Peterson, chief investment officer at Digital who architected the Telx acquisition, told us in an interview earlier this year that the company had no plans to compete head-to-head with Equinix, which remained “a very important customer.”

Combining wholesale capacity with interconnection is a model that more closely resembles services offered by CoreSite, one of Digital’s biggest competitors. CoreSite has traditionally offered both retail colocation and private suites, as well as cross-connects and access to internet exchanges in its facilities.

The value of a wholesale offering is the ability to deploy data center capacity at scale – leveraging cost advantages that come with scale – and to ensure there is room to expand capacity at the same sites in the future. The value of being in a retail colocation facility with robust interconnection capabilities for its tenants is access to a bigger group of players. Digital’s new pitch is enabling customers to “leverage the best of both worlds,” according to Sharp.

A company can connect its infrastructure deployed in a wholesale suites to a Telx meet-me room over a private network link in the same building or in a different Digital data center located in the same metro over a Digital-operated Wide Area Network.

One example of a major cloud provider already taking a substantial amount of data center capacity at Digital’s facilities that will benefit from access to Telx’s “internet gateways” is IBM SoftLayer, Sharp said. The cloud provider occupies the wholesaler’s facilities in about a dozen markets in the US, Europe, and Asia Pacific.

The focus on interconnection is a new phase in the development of Digital as a company. Operating as a real estate investment trust, it has traditionally focused on providing wholesale data center space, with some retail colocation as a small part of its footprint. The Telx deal doubled the size of its retail colo business and was the biggest step it has taken yet in the process of transforming its business model.

The company currently has more than 100 data centers in the US, more than 20 in Europe, and five in Asia Pacific. Of the 20 Telx data centers around the US Digital gained control of as a result of the acquisition, 11 were in its own facilities. Some of the most important meet-me rooms under Telx’s control include one at the Google-owned carrier hotel at 111 8^th Avenue in New York and another one at 350 East Cermak in Chicago, but the company offers interconnection in all of its facilities across the US.

For the time being, Telx will operate as a line of business, reporting to Digital’s COO Jarrett Appleby, Sharp said, but will eventually be integrated more tightly into Digital.