Small Data Center Markets Bracing for Big Change

Gillis S. Cashman is a Managing Partner at M/C Partners.

The architecture of data centers and network infrastructure is undergoing a major transformation driven by mobility and accelerated by the Internet of Things. At a macro level, rather than seeing the need for 50 servers in one data center in the middle of nowhere, we are seeking out servers in 50 data centers very close to the edge.

The advancements in technology and platforms, as well as advancements in the broadband infrastructure, is also contributing to this transition. With more broadband networks being deployed and computing platforms advancing, pricepoints for outsourcing are decreasing. The fact that outsourcing eliminates the need to staff multiple environments makes it an even more attractive option.

The requirements in the smaller markets are similar to those in Tier-1 markets. For a third-party data center provider, it’s a very capital-intensive business. There has been so much demand, focus and investments in Tier-1 markets that Tier-2 or smaller markets are largely ignored. However, you’re going to start seeing a shift in focus into these smaller markets.

We are seeing it from the content side; we are seeing companies like Akamai and cable companies, even Netflix, wanting to have their servers really close to the edge so latency is reduced. They're also looking to establish multiple points of presence within a given market, so that redundancy is more in the network than it is in an actual facility. On the content side, it’s actually very similar to how the cable architecture developed over time.

You initially had node sizes of 5,000-7,000 homes per node. When providers started launching advanced services like voice and data that were latency-sensitive, they had to reduce their nodes to as small as 100 homes per node. We’re starting to see the same thing on the content side. Instead of having one massive data center, we’re now having hundreds of servers across the country in multiple data centers. Netflix is a good example of this. If everyone is trying to watch “Game of Thrones”, and Netflix servers were all in one data center, the network would suffer. If you have hundreds of servers at the edge of the network, you have fewer people "pinging" each server, increasing redundancy and minimizng latency.

Will data center providers offer solutions tailored to specific markets? I think it’s becoming increasingly important to understand the unique business requirements and compliance requirements of a given vertical. What are the regulatory requirements, what are the security requirements of a specific application? Then, you can design solutions that solve those needs. As more organizations outsource their infrastructure, it increases the need for third parties to really understand all aspects of the environment, applications, performance requirements, compliance requirements, etc.

There are many opportunities for investment in this space, but it depends on the market. In the smaller markets, there is a lack of infrastructure, so there is definitely a need, and the supply/demand dynamic is very favorable. However, certain Tier-1 markets are fairly saturated.

We are excited about what the future holds in this space. There’s been a lot of talk about hybrid cloud. The organizations that can figure out how to best utilize it will come out winners. The companies that can tell a customer, “I can support your servers and applications in my data center or yours. If you want to host certain applications in Amazon’s cloud, I will manage the environment and provide you with the right monitoring and application performance reports. "

Having the ability to manage the environment of multiple platforms and multiple cloud providers is a pretty interesting dynamic. It’s still early in the game, but the companies that can demonstrate and execute on those promises are well-positioned moving forward.

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