US Data Center Giants in Europe: the Brexit Effect

*Updated with comments by Eric Schwartz, president, Equinix EMEA.

While the long-term impact of Britain’s vote to exit the European Union remains to be seen, the immediate impact is uncertainty, which is rarely a good thing for any market, including the data center market.

Some of the biggest data center providers in Europe saw that immediate impact of uncertainty in their stock performance right after the referendum’s outcome was announced last Thursday. Equinix, Digital Realty Trust, and Interxion stock value dropped immediately, and while US-based Equinix and Digital have since recovered – Digital’s stock was actually trading higher than ever in the afterhours on Wednesday – the Netherlands-based Interxion had yet to regain its pre-referendum level.

As far as Brexit’s possible long-term impacts, among the chief concerns are potential expenses associated with compliance with whatever new regulations the UK establishes if and when its process of severing from the EU is completed, data center customers adjusting their infrastructure location strategies, the status of data center industry workers in the UK who are EU citizens but who do not have British passports, and whether or not British tech and financial-services industries, both of which have historically been a big source of revenue for data center providers and equipment vendors, will continue to see the same level of investment they have seen in the past.

It’s obviously unclear at this point whether all these long-term concerns will turn into real problems and how big those problems will be exactly.

“It’s too early to really tell what the impact on the data center industry will be,” Zahl Limbuwala, founder and former chairman of the Data Center Specialist Group within the British Computer Society, a UK industry group for IT professionals, told Data Center Knowledge. “Before everybody panics, let’ see what happens.”

Limbuwala is currently CEO of Romonet, a data center management software company he co-founded. Romonet is headquartered in London but has offices in the San Francisco Bay Area. Most of the company’s staff are in the UK, and about a quarter of them may be impacted by Brexit, since they don’t have UK citizenship, he said.

While there is some risk that data center providers in the UK – some of them are Romonet customers – may eventually feel stronger competition from other major European data center markets, such as Frankfurt, Amsterdam, or Dublin, as a result of Brexit, the reality is physical location of a company’s servers still matters a lot, and data center customers aren’t likely to suddenly move their servers from London to Dublin simply because London is no longer part of the EU, Limbuwala said.

See also: Amazon Committed to UK Data Center Opening Despite Brexit

London is one of the world’s biggest data center markets, and there are no indications of this changing any time soon. Digital Realty CFO, Andy Power, told Data Center Knowledge that he spoke with a major customer the day after the results of the referendum were announced, who assured him that the company would continue to consider London a strong market and that it had no plans to vacate its data center space there or in other European markets.

While Digital has had substantial presence in a number of European markets for a long time, it recently increased its stake in Europe in a big way by buying eight data centers from Equinix, which was required to sell them in order to get the greenlight from EU regulators to complete its acquisition of TelecityGroup, another major European player. Digital agreed to pay about $874 million for the property portfolio, which included five London data centers, two data centers in Amsterdam, and one in Frankfurt.

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CyrusOne, a major US data center provider with presence in the London market, declined to comment.

Digital Realty’s leadership did take into consideration UK’s potential exit as they were making the decision to buy the Equinix portfolio. The deal was announced in May, and the company “definitely anticipated that dice could droll like this,” Power said.

The bulk of Digital’s European portfolio is occupied by multinational businesses that provide IT outsourcing and cloud services, and the company expects them to continue requiring data center capacity in the UK and other major European markets. Additionally, internet and mobile giants like Facebook and Uber will continue to have to support all those active markets, meaning demand for local data center services will remain even after the UK exits, Power said.

“Fundamentally, we think the whole EU referendum is not going to materially impact global data center demand,” he said. “We are still committed to our global strategy.”

Comments by Eric Schwartz, Equinix president for the EMEA region, were along similar lines. Continuing growth of data traffic, Equinix's global footprint, and the multinational nature of the bulk of its customer base would cushion the company from potential market-specific fallout, he said, adding that the trend toward distributed IT infrastructure is here to stay, all of which positions Equinix well to withstand any further post-Brexit turbulence that might be in store.

"Our well diversified customer base is broadly deployed, with more than 80 percent of our revenue coming from customers deployed across multiple metros," Schwartz said in an emailed statement. "We believe the trend of enterprises distributing their IT at the edge to be closer to end users to increase performance will continue regardless of how Breixt is implemented."

The vote's outcome is "complex and will unfold over the next several months," he said. "During that time we’ll be closely monitoring how the exit will be implemented."

Despite all the uncertainty and potential disruptiveness of Brexit, there may be some upsides for the data center industry, Limbuwala said. As a country that’s independent from the rest of Europe, UK can do things to position itself as a more attractive data center market.

Different states in the US compete with each other for data center projects using things like tax incentives. “There’s no reason the UK couldn’t do some of that,” he said. These could be incentives not just for data center providers, but also for vendors and manufacturers who serve the industry and who could be incentivized to move some of their manufacturing capabilities to the UK.

If the UK does indeed remain outside of the EU and after the initial turmoil subsides, “I would hope that the UK data center market petitions the government,” Limbuwala said. “This is something the UK could do as an independent” entity.