Cologix CEO Bill Fathers on the Pandemic, the Colocation Market, and Strategy

Cologix exemplifies just about every big trend the data center industry is seeing these days.

It’s one of the beneficiaries of the large appetite infrastructure investors and sovereign wealth funds now have for investing in data center businesses. Its retail colocation and interconnection business has been booming, according to CEO Bill Fathers, while hyperscale platforms have signed on for large amounts of capacity with Cologix to host edge nodes for their clouds.

We interviewed Fathers for The Data Center Podcast to ask him about the company’s experience through the pandemic, its strategy in the interconnection business, its view of the hyperscale customers, its plans in Ashburn (spoiler: it’s not about chasing hyperscalers), its recent entry into the Santa Clara market, his thoughts on the recently foiled AWS data center bombing plot, and more.

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Transcript: Cologix CEO Bill Fathers on The Data Center Podcast

Yevgeniy Sverdlik, DCK:

Hi, everybody. Welcome to the Data Center Podcast. This is Yevgeniy. I'm editor in chief at Data Center Knowledge. We have with us today Bill Fathers, he's the CEO of Cologix. Bill, thank you for talking to me today.

Bill Fathers, Cologix:

Welcome. And it's great to catch up.

Yevgeniy Sverdlik, DCK:

Likewise. Cologix is one of the largest privately held data center providers in North America. I want to start with, I want to talk a little bit about your guys' experience through the pandemic. How has the past year been for you with the virus and the crisis, and then all of the political turmoil we've been going through? What's it been like?

Bill Fathers, Cologix:

It is a year, isn't it? Just over, since it all started. I'd say the first phase, pretty similar to a lot of the other data center providers. I'd say the first phase was characterized by very quickly having to adapt the business to the new modeling, working from home and of working out the right balance in our data centers between ensuring that perhaps, we have all the right protocols in place. You can't always necessarily allow full access to customers and partners into the data centers, but equally they will have to get on and do their work.

Bill Fathers, Cologix:

So, we had to quickly adapt and we actually found that as a business, we operate more effectively in this mode than we did perhaps previously, when we spent more time physically in the office. So we found perhaps, I'd say over the year, that the working remotely has worked better, more as generally than working in offices, generally.

Bill Fathers, Cologix:

In terms of demand, we saw a huge spike in demand for more bandwidth. As you know, we have 580 carriers across our 11 markets and they represent a large piece of our business. So, most of our carrier clients quickly needed a lot more capacity. So, we saw an initial wave of upgrade requests really from March, April all the way through to June July, and that was across the United States and across Canada.

Bill Fathers, Cologix:

The next phase we saw was only a surge in demand from customers who were in the public cloud ecosystem. That was both SaaS providers, enterprises who were embracing cloud and all the big cloud providers themselves. And that theme of the big global cloud service providers needing more capacity just grew and grew as the year went on. Happy to talk about that at any length required.

Bill Fathers, Cologix:

In terms of our ability to fulfill that demand, I think we found that the big concern we had was, could we continue to construct and build both expansions for existing clients for brand new facilities, either extensions of current facilities or even some of the greenfield sites we've built. And thanks to a lot of hard work and really disciplined adherence to allay the COVID restrictions, we have managed to actually do a record set of construction projects across our markets in the past few years as well, sorry, last nine months as well. So construction has been obviously more complex. It's taken a little bit longer. It's probably a bit more expensive, but it is really to fulfill that demand, basically.

Yevgeniy Sverdlik, DCK:

Can you try and recall the moment you realized the pandemic is here, it's real and it's a big thing, and it would require some big changes to the way Cologix operates?

Bill Fathers, Cologix:

I think there was definitely a first couple of weeks where I think lockdowns, obviously, we're in 11 different markets in Canada, the United States and all the different cities within across the United States and Canada, had very different timings and different levels of reaction. Here in California, the reaction was very quick and very sudden, perhaps the East Coast it was a bit different as well. I think it was really by mid to late March, we appreciated that it was clearly going to impact the restrictions that were being placed on people, and the need to obviously make sure we protect all of our employees as much as we can.

Bill Fathers, Cologix:

By mid to late March, we knew that we had something very new that we were going to be dealing with. It was probably the month of April of last year in which we spent a lot of time preparing for every eventuality, which then probably by May, we'd hit a rhythm and since then, we've just been refining what we do as opposed to having to make radical changes very quickly. So it took us about a month, I would say, to completely adapt the business to this new model.

Yevgeniy Sverdlik, DCK:

As restrictions were at various levels in different markets, did you adjust operations as you go from market to market, or was there a company-wide policy that was implemented?

Bill Fathers, Cologix:

It was a company-wide policy and that has proven to be a wise move. As you've seen, different levels of restrictions, different rules have applied in different markets, different counties even within the same city, over the past year. And so, I think what employees would have find confusing would be a back and forth changing of policies frequently. I think the thing we probably have to fine tune the most was client visits into the data center. Obviously, we offer a great deal more in the terms of Smart Hands and managed services for clients who you need us to do something, but managed services is not really part of our business. But we slightly expanded the portfolio of things we could do to help clients of really having to make the trip, and then partners and certain maintenance contractors and construction contractors getting that balance right.

Bill Fathers, Cologix:

I'd say that's in fact, what we've probably spent more than six, nine months getting just like we feel, based on our last review with customers, that they're getting enough access to the data center, they're going to need more access and obviously, we were able to complete our construction projects. And our level of community spread across the footprint is incredibly low. So, we've had really no material cases of spread of COVID within the facility. We have had employees of course, often because the jurisdiction that we're in has, perhaps had children go back to school, and that seemed to be one of the biggest causes was getting it from the kids basically.

Bill Fathers, Cologix:

So, we've been pretty consistent across the company. Obviously, I'm talking a great deal about obviously, is sales grew steadily through the end of last year, but by towards the end of last year, our sales volume was nearly double, as opposed to the previous year. So I think for a lot of businesses, the business is performing extremely well, that helps. I think if you're struggling, I suspect that having to deal with negative crisis is more difficult.

Bill Fathers, Cologix:

Most of the challenges we've been facing are really good problems to have. It's how fast can you sell and how fast can you install, which are definitely in the category of most problems being solved. It's a very human level. If you're working for a company where, by April May, it was pretty obvious that we were financially going to be a business that luckily, by nature of what we do, supporting so much of the nation's digital infrastructure and critical fabric, that we were going to growing and growing quickly. So, I think we've been able to make sure employees have felt engaged, that their jobs are safe. In fact, we need them more than ever and obviously, that's been a key part of our strategy.

Yevgeniy Sverdlik, DCK:

As CEO, what was the first big decision you had to make as a reaction to the pandemic?

Bill Fathers, Cologix:

I think it was a very human level, as we were responding to the early information and the risks associated with community spread and the implications of getting COVID, it was thinking very hard about how we minimize the risk to our employees, and how far we take that. As we've always said, none of us in the executive team would do anything, but ask our employees if they knew what we were doing. So, just getting the right balance there, and we have 300 permanent employees. I'd say I spoke to most of our employees at least once a month for the first four or five months of the crisis, just to make sure that we were staying close to the reality [inaudible 00:08:30].

Bill Fathers, Cologix:

So, the first decision was around keeping the data centers running, asking our employees to slightly modify their shift patterns, but obviously wanting to make sure that the business stayed on. The second decision was around the balance sheet. When you're faced with the business that generates cashflow positively, so create our own cashflow. But really, I think everyone in April May last year was looking back at the next six, nine months thinking, this could go one of two ways.

Bill Fathers, Cologix:

And so, just quickly making sure that our balance sheet was in a state that it was actually, we're in a fast road company, you rarely think about the scenario where you're slowing down with those. So, we spent a lot of time preparing for a scenario in which the business would slow down, and made the decision that we will not let any employees go. That's non-negotiable for us, is that we would not let any employee go for as long as the pandemic is around. So, we prepared our balance sheet for really any scenario that meant there was no scenario which we'd have to let anyone go for five years basically.

Yevgeniy Sverdlik, DCK:

So, in case things didn't play out the way they played out, in case the economic situation-

Bill Fathers, Cologix:

Exactly.

Yevgeniy Sverdlik, DCK:

Did affect Cologix negatively.

Bill Fathers, Cologix:

So, we talked to our equity partners and made sure that they had sufficient debt capacity to survive the rain storm. Now, as it turned out, that was a waste of time. The complete reverse happened. We didn't see a down turn, in fact, we saw a huge and have continued to see, an incredible growth that surged through the business since really March of last year.

Yevgeniy Sverdlik, DCK:

And then, you said in the beginning that you realized that you actually operate better in this mode. So, what are the changes that were done as a result of the pandemic that you guys are going to keep?

Bill Fathers, Cologix:

We've become much more focused. So I would say, we keep our internal meetings to the bare minimum, and when we meet, we're really crystal clear about what we're trying to accomplish. We tend to find that we focus on fewer things and focus on doing them better. We've become a much flatter structure. So, we tend to meet as a company, every two weeks, every employee in the company is in a meeting together, which is not all just business performance. A lot of that is about cultural and welfare of folk. And previously, I think we did all hands meetings once every three months, but now we do them every two weeks. They have a lot of candid conversation in them, which in a situation like this requires some leaders to be candid at all times.

Bill Fathers, Cologix:

And they're much less about company roadshow or updates. It's about how things are going in every different market, what's going on in everyone's lives. So, we keep that going for sure. Actually, at the very top of levels, the board meetings of the companies now take an hour and they're done by video. They used to be a day and a half and they would take people flying from all over the world. We have investors from various parts of the world who would come together every three or four months. We are now able to do them much more frequently, and we do them in an hour and we cover the material much more efficiently as well. So, I think meetings have just become a lot more efficient.

Bill Fathers, Cologix:

The counter argument is in theory, not so good at problem solving. If you're all in the same room, they can [inaudible 00:11:58], things can come up that you can solve immediately. We haven't found that to be a problem just yet. So far, I'd say, so good. But I think, it's been important because we're accomplishing a great deal. The business is growing faster than it's ever grown and therefore, we have an obvious set of five or six things to focus on. And we're very good at saying no to things. We don't take things on that we don't think we can do really well. And we're quite quick to try and end the conversation by saying, is this actually material? Is it something that's going to make a difference? Why don't we just stop wasting our time on it? And so, we've become a bit more ruthless, I'd say, about not wasting time or things that don't make a difference.

Yevgeniy Sverdlik, DCK:

So, these things like holding meetings virtually, having people work remotely, is that something you guys are going to keep for the long-term?

Bill Fathers, Cologix:

For sure.

Yevgeniy Sverdlik, DCK:

Did you get rid of some office space?

Bill Fathers, Cologix:

Probably. We don't have a great deal in the first place, but we know now already that the office space we have is not fit for purpose. It doesn't fulfill our need. The days of people sitting in cubicles and offices is never going to happen again for us. We're thinking again about, we do need to come together and collaborate, but we want to do that in environments that are, certainly for the next year or two, probably going to take into effect that we all want to be a bit more spaced out, and we'll be using our office space for either meeting with clients or partners, and or in big important meetings where we've got to think really creatively. But other than that, we certainly won't be likely to be enforcing the need to go to an office outside of our data centers for the foreseeable future.

Bill Fathers, Cologix:

So, we're feeling away and we're quite driven by what employees think. We're in a very interesting situation. So, a lot of our markets in the United States feel like we're coming out of the pandemic. Over 55% of our business is in Canada, and unfortunately for Ontario and Quebec at the moment, it certainly doesn't feel like that as you may know. They're still in lockdown. It still feels to them a bit like it did six months ago. So, we're very cautious about not brandishing the fact that in some markets, people are vaccinated and not under any restrictions, whereas in other markets, they're a little bit different. So, we try to approach a common approach.

Yevgeniy Sverdlik, DCK:

One thing, one piece of news I've been thinking a lot about last couple of weeks was this AWS data center bombing plot. I'm sure you've heard of it. So, for those who maybe aren't familiar for the listeners, this person was arrested and he was allegedly planning to blow up an AWS data center. What did you think when you saw it in the news as a leader in this digital infrastructure space?

Bill Fathers, Cologix:

I think physical security is something that we obviously, take very seriously, and I think there are levels of threat that you have to guard against and invest a lot of time and money doing that. If you have somebody that is looking to commit an act of domestic terrorism as that person was, well then, the implications of that are a whole different level of physical security that you would need to then modify your entire business model around.

Bill Fathers, Cologix:

So, I think for everybody, it's not one of those things where you can just slightly adapt your current physical facilities and security level to then genuinely mitigate that threat. You just can't. You'd have to start again and think very differently about the kind of infrastructure that you build. So, we're seeing that one as a bit of a black swan, but if somebody is determined enough, I'm sure there are many buildings across the world that would be vulnerable to that kind of attack, which is very difficult to mitigate against.

Yevgeniy Sverdlik, DCK:

So, you're saying black swan event, something that probably could happen anywhere, and one of those things that you can't really prepare for across the board.

Bill Fathers, Cologix:

Yeah. All of us in the industry, the last 12 months we've obviously had pandemics, we've had civil unrest in many of our markets, we've had freak weather events, you name them, fires, smoke, tornadoes.

Yevgeniy Sverdlik, DCK:

Texas.

Bill Fathers, Cologix:

Texas, power, all that stuff. So, we've proven ourselves to be pretty resilient frankly. Add it to the list. I'm sure we'll adapt and resolve and find a way of mitigating it.

Yevgeniy Sverdlik, DCK:

And then your guy's recent news, the Santa Clara data center. Cologix recently acquired a facility from Santa Clara from vXchnge. It's an operating data center, complete with customers, seems like a logical deal. Gives Cologix a West Coast presence, it's a good interconnection asset. It already generates revenue, has room for expansion in the market where real estate supply is super tight. Does that summarize the rationale or did I miss anything there?

Bill Fathers, Cologix:

Yevgeniy, that was the perfect summary of it. We'd spent a long time looking and that's been our gap in our portfolio. We have Columbus in the North, we have Dallas in the South, we have Ashburn in the East, and now we have Silicon Valley on the West. For most of our customers who are starting to deploy edge architecture, certainly cloud edge is the way we think about edge at the moment. Many of them are looking to deploy in at least two of the four markets I just mentioned.

Bill Fathers, Cologix:

So, for lots of our Canadian and North American customers, when they're ticking off the list of places they want us to have a platform, Silicon Valley and Santa Clara has always been the standout one that we didn't have. And so, we didn't have to think too strategically about it. We've got a lot of pent up demand from our existing, both hyperscale customers and customers who were part of our cloud ecosystem, who were highly confident we'll quickly absorb the available supply we do have, and as we initiate the build of the 10 megawatt expansion in that facility. It's already been zoned and approved, so we're expecting that we'll probably get that construction under way in the quite near future.

Bill Fathers, Cologix:

Again, we're not entering Santa Clara, Silicon Valley with a view to taking on Digital, Equinix, CoreSite. That's not what we're there for. That for us is a strategic gateway for our cloud platform. That is always going to be a part of where we are. Obviously, the big expansions we're driving into markets are in markets like Montreal, Columbus, Toronto, Vancouver, but those are the markets in which we're deploying two, three, four new big data centers, Santa Clara is a market. Exactly as you say, it's very supply constrained, it's a strategic gateway for us, and that's probably going to be something that lasts us for several years.

Yevgeniy Sverdlik, DCK:

How did the deal come about?

Bill Fathers, Cologix:

I called up the CEO of vXchnge a couple of years ago, and he was very kind enough to host me. We walked around the data center then, and we both have stayed in touch. We were also fortunate to acquire another excellent vXchnge asset in Minneapolis about a year ago, which is May, June of last year. Actually, that was one of the other consequences of COVID was we were just about to close on that transaction. We just paused for a couple of months purely to see what impact the market would have. It didn't have any impact, so we went ahead and closed that.

Bill Fathers, Cologix:

So, we had already got great familiarity with the process of acquiring and integrating the excellent assets from vXchnge. We kept in touch and obviously, the demand on our side just kept growing and growing and obviously, we made many overtures to them and eventually were able to make it happen, so it was great. It does make a lot of difference. If you've just acquired a company from someone else and you know how the processes work to onboard all their clients and onboard the billing, it's much easier.

Yevgeniy Sverdlik, DCK:

So, it's a valuable asset obviously, strategically speaking. Why did vXchnge sell it, do you think? Was it just because the asking rates are really high right now and it was an opportune moment?

Bill Fathers, Cologix:

I never know actually. I must admit, I don't know why, but good for us that they did. I'm not sure what the catalyst was for them to sell it.

Yevgeniy Sverdlik, DCK:

Can you share how much Cologix paid for that site?

Bill Fathers, Cologix:

Unfortunately not. No. I don't think we've disclosed that, so I better not plow into it without being absolutely clear. I know we've, obviously we went through a debt financing round, but I don't think even then it was totally clear. So unfortunately, not at this stage. If I can Yevgeniy, I will, and we'll follow back up with you.

Yevgeniy Sverdlik, DCK:

No worries. Having written about the data center business for 10 years, I'm very used to this answer. Talk about your hyperscale slash interconnection strategy. You've said before that the strategy is to have hyperscale data centers tethered to interconnection centers, a similar strategy that Digital Realty has been talking about. You have a lot more interconnection data centers than you do hyperscale buildings, obviously. So, is the plan to eventually have hyperscale site in every market you're in today?

Bill Fathers, Cologix:

I don't know if we'll do it in every market. We definitely see the demand in every market and obviously, a business that was built on the foundation of network interconnection, we then added 28, 29 cloud onRamps. And in this last iteration, we're seeing a lot of our big public cloud service provider customers deploying their own edge infrastructure, so Microsoft, Amazon, Google. Their own edge infrastructure is now deploying in our data centers.

Bill Fathers, Cologix:

That is clearly attracting a different profile of workload that sees value in being physically on the same campus as the interconnection hub, which now obviously comprises of an onRamp and bits of Azure, bits of Google and bits of Amazon infrastructure. So that's what's happened. That's what's different. So, we now see that customers, instead of just wanting to co-locate 250 kilowatts or 100 kilowatts worth of capacity in which an annex building would be fine, we saw demand second half of last year for customers saying, I want five to 50 megawatts and it has to be on your campus.

Bill Fathers, Cologix:

So, the initial interest we saw was in Columbus and Montreal, and at the end of last year, the second half of last year and the beginning of this year, we've seen nearly 30 megawatts of sales to customers who want between 1 and 30 megawatts of capacity in that market.

Yevgeniy Sverdlik, DCK:

And this is hyperscalers wanting to put a big chunk of their, like a node or an edge node, but not a small edge node in a tier two market so to speak.

Bill Fathers, Cologix:

It's two things. It's certainly in some cases, it's the hyperscalers wanting to put a lot of capacity as close to the edge as possible. It's also big SaaS companies or enterprises who want to put workloads next to the cloud edge node, either because their SaaS platform is something that benefits from being so close, or it's an enterprise that's gone whole hog, and is doing amounts of AI processing with databases needing, that's obviously the latency in database synchronization is key. But the bulk of it has been, so far, cloud service providers. But also, we're now seeing enterprises and SaaS players who are buying one to five megawatt chunks.

Bill Fathers, Cologix:

So, we picked Columbus and Montreal markets where we have obviously very strong hyperscale, or rather very strong interconnection hubs. We're also now seeing that same demand in Toronto, which is a market that we will likely announce some further expansions in. And then Vancouver is the other market in which we're seeing, that's slightly smaller. So that's one to three megawatts type of edge deployments. Whereas in Columbus, it's 10 to 30 megawatts, Montreal it's 10 to 30 megawatts, Toronto it's 5 to 10, and in Vancouver, it's 1 to 3 megawatts.

Bill Fathers, Cologix:

I expect we're going to see the same thing in Silicon Valley. We'll have a decision to make there as to whether we want to participate in that game. And then in Ashburn, as you know, we have a really strategic piece of land there that we are actually underway in terms of construction, and we're building a 120 megawatt campus. We're also obviously simultaneously, creating an interconnection hub in that market. So, we're building an interconnection hub and we're building a hyperscale capacity at the same time, but that's obviously, that's a whole different conversation. But so far it's been, as I say, Montreal, Columbus, now Toronto and Vancouver. And then, I suspect we're going to see the same thing in Ashburn and Silicon Valley as well.

Yevgeniy Sverdlik, DCK:

I do want to talk about Ashburn a little bit later as well. You guys talk a lot about cloud onRamps, that's a big part of the strategy, onRamps for the big hyperscale clouds. Tell us what effect does adding an onRamp to one of the major players in the market. What effect does that have on your business there? Does that mean more demand from the enterprise end-user side or SaaS side, or does that mean if, say a hyperscaler has an onRamp in one of your data centers in a market and they see a lot of demand, does that mean they'll eventually want more capacity from you guys there to serve that demand? Is it both?

Bill Fathers, Cologix:

Both. Absolutely. So, maybe we just walk it through quickly. So obviously, the onRamp is attracted by the carrier neutrality and the density of networks you've got in your data center, because it saves them money. So that makes sense. Once the onRamp starts to pick up and the onRamp starts to attract more private network as opposed to public network traffic, so the carriers then have to upgrade their infrastructure to try and keep up with the rate of growth of the public cloud onRamp growth. The peering traffic obviously grows quite quickly. So, it also typically tends to attract a lot of new carriers.

Bill Fathers, Cologix:

So, we found maybe an onRamp will attract 10 or 20 new carriers in a particular market, so that ecosystem further strengthens. Then, as you say, quite a few security CDM providers, SaaS providers are attracted to it because there's value add in what they do to be very close to it.

Bill Fathers, Cologix:

Then you get, as you say, a plethora of other types of platforms that are attracted. We host three of the biggest public gaming platforms in the world and increasingly, a lot of them are owned by the big global cloud players. And they run big parts of their infrastructure on the global cloud platforms, so they tend to want to co-locate as well.

Bill Fathers, Cologix:

And then as you say, enterprises who are deploying edge strategies start to get sucked in. And now the latest trend, you put your finger on it, which is if you have the onRamps in the market, so it's quite logical then for the cloud service providers, the global guys to come and put their edge nodes with you or very near to you if you can. And that seems to be the wave of demand that we're all currently focusing on. Feels like the number of onRamps in North America is reaching its peak. I'm not sure there's going to be that many more coming up for grabs, maybe five or seven a year for the next couple of years, and then it'll slow down. You don't need any more, bandwidth isn't that expensive.

Yevgeniy Sverdlik, DCK:

We've reached peak onRamp.

Bill Fathers, Cologix:

I think we're getting there.

Yevgeniy Sverdlik, DCK:

Why is that?

Bill Fathers, Cologix:

It's economics. It's economics and performance. I think for many of them, many of the hyperscalers, they've reached that tipping point where deploying another node in an even smaller market where there's even less customers obviously, there's a big fixed cost to that. But the benefits then can be either cost savings or improved latency, but the cost savings are not there if actually, long haul bandwidth gets cheaper, which it does every year. So, long haul bandwidth is getting cheaper and cheaper. And the application sensitivity has limits. If you look at where are the markets they're all in now, there's not that many markets left where there aren't an onRamp.

Bill Fathers, Cologix:

Of course, I could be talking out of my hat, Yevgeniy. This is what I believe but obviously, the hyperscalers themselves will take a view on that. So, you exactly articulated the way the demand cycle works very accurately. That's what happens with onRamps and over time, some of them we've had for four and a half, five years, they just become more and more meshed into infrastructure because obviously, they often have dozens of carriers that are their preferred partners. You have enterprises connecting directly to them. You have SaaS platforms and then they're of course, connecting all the way back to their own edge nodes or their own core infrastructure. So, they become increasingly part of your core infrastructure

Yevgeniy Sverdlik, DCK:

Now Ashburn. You mentioned you have a big piece of land there, you can support 120 megawatt data center campus. And you said you started building there, so does that mean there is already a hyperscale cloud customer that's signed on?

Bill Fathers, Cologix:

No. We basically are trying to do three things at once, let's just stick with two, two things at once. So, we have secured carriers. We will probably secure cloud onRamps in the very near future into the interconnection part of that solution. So for many people, they're dependent on one or two providers for critical interconnectivity. If you think about the scale of Ashburn's peering, for it to be one or two providers that do all of that, most people are saying they want an alternative. So, we're there to service the demand for customers who want an alternative, either for resiliency or commercial leverage. So, we're creating a new, from scratch, interconnection hub.

Bill Fathers, Cologix:

We have had demand from the hyperscalers to basically build them an 80 or 100 megawatt build-to-suit on the facility, but we're playing the longer game. We've been very fortunate to have a huge amount of success in a lot of markets that are helping us generate a lot of cashflow, so we're able to time carefully how we do this.

Bill Fathers, Cologix:

So, the next thing you'll probably see from us is something like a 40, 50 megawatt initial build, which is currently underway, that'll comprise of carrier hotel type interconnection hub and obviously, we're starting it brand new, so it'll all be entirely software based. We won't bring the old fiber model, we'll bring purely SDN interconnectivity model. We'll probably disrupt the market a bit with our commercial model there as well, a little bit in the way we're going to approach it.

Yevgeniy Sverdlik, DCK:

How do you mean?

Bill Fathers, Cologix:

Well, it's all software, isn't it? At the end of the day, if you've physically built all the interconnections you need and the world is moving towards increasingly software defined networking, and we're a new entrant in the market, it does give us an opportunity to rethink how the commercials of this should work.

Bill Fathers, Cologix:

If a customer is hosting a huge amount of infrastructure with us because it's highly valuable, but they need 1,000 cross-connects with multiple cloud players and it's all being done in software, then I think the fact that we're building this without assume... Obviously, the old model is you build a very expensive carrier hotel infrastructure. Most of the buildings we're in are downtown, it costs a fortune as you know, to construct in these high-rise downtown buildings, and the commercial model surrounding cross-connects is there because you need to create some cash flow to keep and maintain these facilities.

Bill Fathers, Cologix:

If you're building something from scratch and it's all being done with next gen technology, you can rethink it. And in the long run, it's about attracting as much traffic into your facility as you can. And the way you commercialize that can be rethought. It doesn't all have to be about cross-connect charges. Obviously, over time is we're able to rebuild markets from scratch, then we have that flexibility, but in a lot of our existing markets, you inherit a cost structure that you just can't overnight, change cross-connect pricing. But if you're starting from scratch, then there's an easy way of doing it.

Yevgeniy Sverdlik, DCK:

And so, building an alternative interconnection point in Ashburn next to Equinix. So obviously, you've spoken to tons of carriers I'm sure, is demand just there? They're waiting for, we want an alternative, as soon as you're finished build, we'll go in there. Is that what it's like?

Bill Fathers, Cologix:

As you know, the demand for latency-sensitive workload in that market is just growing and growing all the time. We have obviously, deep relationships with all of the carriers already that we'll be able to bring into the market in Ashburn. Again, with the cloud service providers, we already host a lot of their onRamps. For us to mobilize and motivate them to put in new onRamps into our facility to offer their customers diversity, we're able to commercially incentivize them to do that.

Bill Fathers, Cologix:

So, I'm not saying it lightly. We know that this is a difficult act to pull off of recreating an interconnection ecosystem, as we have created in other markets. We're taking a 10 year view, so we think it's something that will take us between 5 and 10 years to really stimulate, build and grow and grow. Frankly, if what we can do is take roughly 60 to 80 megawatts market share, we'll be very happy. That will be for us, a great result. Something like 25,000 cross-connects, 30,000 cross-connects with maybe 100 carriers, that for us, would be spectacular.

Yevgeniy Sverdlik, DCK:

I see. At that point, you'll be able to say, okay, we've achieved what we set out to achieve.

Bill Fathers, Cologix:

And the reason we're doing it is not just to add Ashburn to our list of places we've been to, because it's such a ferociously competitive market with such obvious strength in the incumbents, who are very good operators. Don't get me wrong. It's just that if you're in our business, which is now hosting cloud gateway or traffic that's oriented towards the cloud ecosystem, all of our customers say, what have you got in Ashburn? And so, they could contract with one of the other providers, but for us to be able to say to them, sure, if you're the fastest growing gaming platform in the world, right. So, it's one of our clients and they say to us, listen, we've got an MSA. It was really hard to negotiate an MSA. We've done it. We're in three markets with you. Could you just add Ashburn? That's the market for us to be in.

Bill Fathers, Cologix:

Not that we're going to become the next Digital in that market where when Microsoft come out with a 32 megawatt build-to-suit proposal, we'll be there. That's not us. We'll be interconnection focused, our existing clients will logically grow with us into that market, and we'll keep differentiating ourselves around the interconnection story. As hard as we know that's going to be, but there's so much fiber throbbing under the ground of the land parcel we've built, as you'd imagine, there's 65 carriers in the manhole right by our land, and the lateral cost for them to come into the facility, firstly, we'll cover it. It's going to be free, but it won't cost us much to do that, so it's not a bad thing to do. And I think that market needs shaking up, doesn't it Yevgeniy? You know this better than anybody. Boy does that market need shaking up in terms of the competitive dynamic.

Yevgeniy Sverdlik, DCK:

And you're calling it this Ashburn site digital edge to me, and I'm sure to many people, when they hear Ashburn, they hear core. It's as core as it gets and obviously, I understand how any place can be an edge for someone's network and core for someone else's. So, why are you guys calling this a hyperscale edge or digital edge?

Bill Fathers, Cologix:

The edge that we're most focused on as a company is cloud edge, the edge of the cloud, the public cloud footprints, as opposed to the device edge. We have a little bit of device edge business in our ecosystem, but it's pretty natant. So if we focus on cloud edge, the goal will be to secure a number of the devices and access points that the big cloud providers put at the edge of their network, namely the onRamps and the edge nodes. They are target number one for that environment.

Bill Fathers, Cologix:

If we're not successful in achieving that, then we won't achieve our goal. As you say, that's the only thing that defines it as an edge location. That just happens of course, that they also run the bulk of their core infrastructure in that market as well, not three miles away, but the very fact that those are the biggest in terms of peering traffic onRamps in the world, says to us that's what we're targeting, and the workloads that are attracted to close proximity to those edge nodes is what we're really focusing on.

Yevgeniy Sverdlik, DCK:

And what's next in your expansion strategy? Are you going to be focusing on Santa Clara and Ashburn and for now that's the focus, or are you looking at new markets in North America, new markets elsewhere?

Bill Fathers, Cologix:

The markets we're in and we're now in 11 markets, I'd say just those markets probably provide us with runway for a long time. We're potentially building upwards of 200 megawatts of capacity over the next year or two across those 11 markets, of which probably 60%, 70% is under contract. So those markets [inaudible 00:38:12] over Columbus.

Bill Fathers, Cologix:

Columbus, we've just announced our fourth data center in that market, and we'll be announcing our fifth in the not-too-distant future. So that's an example of a market where we're seeing 20 to 30 megawatts a year of absorption, and that seems to be growing. So, across our 11 markets, couple a hundred megawatts of growth over the next year or two. Last year, we doubled the size of the company. So, we're growing 100% a year at the moment and we're growing fast, so I think those markets are probably great, and it is always the one that got away.

Bill Fathers, Cologix:

So, there's always the next market in the United States. Actually, we're comfortable in Canada. We always look at Calgary. We always look at Ottawa. We just can't get comfortable. There's enough of a concentration of networks and or cloud onRamps that's likely to accumulate in those markets. But in North America, you know that better than anybody. So, there's always the one that got away and there might be one or two other markets. We wish we owned the [Pittock 00:39:20] building. That was a fantastic, obviously asset that has gone to a very good owner and good luck to them.

Bill Fathers, Cologix:

That would have been a facility that would have fit in very well with our portfolio. And there's one or two others aren't there, that are out there. But never say never, but the 11 we've got, will keep our investors happy for probably a long time, 10 years of growth in the markets we've got, but never say never.

Yevgeniy Sverdlik, DCK:

Cologix benefited from this trend of traditional infrastructure, investors and sovereign funds getting into the data center space. You guys are a prime example of that trend. Stonepeak Infrastructure bought the company in 2017. Then two years ago, you got 500 million from Mubadala Investment Company, the government of Abu Dhabi's sovereign fund. Are you planning to raise more capital in this way, as you continue building and expanding?

Bill Fathers, Cologix:

In the near future, we have sufficient capital, both equity and debt, to fulfill our growth needs. And that's saying something because as I said, we're building a lot and obviously, we're able to use their financing for a lot of the business that we have under contract.

Bill Fathers, Cologix:

Something that we're always looking at is our cost of capital. As we are diversifying into the hyperscale edge business, we recognize that the returns in the yield you get from your interconnection type facilities, are not likely to be matched as we build these larger 30 to 48 megawatt facilities. The quantum of return is spectacular, but the actual yield return isn't great. So, we're always in conversations about how we might get access to a lot of very low cost capital which clearly, the big guys have created joint venture structures with sovereign wealth funds to achieve that, and prevent their balance sheet from getting too much exposure to it, obviously on a much smaller scale. That's the noodling.

Bill Fathers, Cologix:

So, I'm not teasing something that's about to be announced. I don't know the answer to that, but I have enough quantitative capital for now, but the rate at which things are growing at the moment, I wouldn't be surprised if, at some point, we consider needing yet more access to capital. And then if I do, it would be great to have access to really low cost capital that's expecting core plus returns, so that there's a piece of the business. I won't go on, but it's a very interesting topic because the question is, how much more would the hyperscalers outsource, if you are able to get your cost of capital so low, but it's even cheaper than they can do it? Well, you never get it cheaper than they can do it, but it's just the demand sensitivity.

Bill Fathers, Cologix:

If you can achieve returns at a lower price point, how much more of the market is there? And I think a lot of us are probing that a little bit to say... We get asked all the time by the hyperscalers if we want to build a build-to-suit for them in our markets. And quite often we say, well, this is our return expectation because it matches the return we get from our core business, and we're often quite a long way off what they would be looking for. But they're obviously specialized providers who are fine with that return and off they go. But something we often contemplate.

Yevgeniy Sverdlik, DCK:

You have to give them something that they cannot do themselves. So, it's either going to be faster, or cheaper, or in a place where you are willing to take more risk than they are, say like a new market.

Bill Fathers, Cologix:

That's it. And we're sticking to our guns on, we do latency. That's what we do. If you're interested in being in a market and you can be in our campus and get better performance, that is the business we're in. We haven't yet gone into more challenging markets where they can't do it themselves, or try and pay the price arbitrage. But we're all got to be realistic. The pricing of these big hyperscale facilities isn't going to go up over time is it? So, running one of these businesses, you just have to think forward all the time about how you're going to lower your cost of capital.

Yevgeniy Sverdlik, DCK:

Okay Bill. That's all I have. Thank you so much for your time. Thank you for talking to me.

Bill Fathers, Cologix:

Thanks Yevgeniy. Glad we made it work technically as well.

Yevgeniy Sverdlik, DCK:

Me too.