The Hottest Colocation Markets are No Longer in the US and Western Europe

The main story in the business of colocation (building and leasing data center space) over the last five years or so had been the explosive growth in demand from hyperscale platforms as they raced to expand capacity. In addition to building enormous data center campuses in remote areas on their own, Microsoft Azure, Google Cloud Platform, Facebook, and the like leased tons of capacity in densely populated areas from colocation companies – they did both at mind-boggling scale and velocity – completely changing the nature of the colocation business as a result.

That story, however, took place in the biggest and most mature data center markets: places like Northern Virginia, Amsterdam, or Singapore. While still growing, many of those top markets have now matured, their growth rates either plateauing or approaching that point. But global connectivity has not plateaued. More and more people around the world are coming online, and more businesses are transitioning to cloud-based infrastructure. The attention of those making decisions about where hyperscale cloud platforms or colocation providers should build their data centers next has now shifted to markets they hadn’t looked at in the past.

The next phase of the data center boom is happening in places like Jakarta, Chennai, Osaka, Warsaw, Zurich, and Salt Lake City. To get a better understanding of what’s creating the gravitational pull in these places, we recently caught up with Jabez Tan, head of research at Structure Research, who recently published a report that provides a detailed update on the latest trends in data center hot spots around the world. Tan to talk about his findings. (Scroll to the bottom of this article to listen.)

2,000MW Annually

The size of the global data center colocation market, including both wholesale and retail colocation, is now about $54 billion, Structure estimates. The top 15 providers account for about half of the market, the largest among them being Equinix, Digital Realty Trust, China Telecom, NTT, and China Unicom.

Structure expects the colocation industry to add close to 2,000MW of new data center capacity annually between 2020 and 2025, 38 percent of it in Asia Pacific, 30 percent in North America, 27 percent in Europe, Middle East, and Africa, and 5 percent in Latin America.

While the data center market in Latin America is growing faster than in any other region, when looking at the volume of data center capacity being added and leased, Asia Pacific is where the bulk of the action is taking place. Thanks to China’s sheer population size and its rapid economic development, the Asia Pacific colocation market as a whole overtook North America’s in 2018 in terms of revenue and in 2019 in terms of total data center capacity, Tan told us. Capacity lags revenue because pricing tends to be lower in more mature markets.

But China isn’t the whole story in APAC, a large and diverse region that encompasses many different markets. The Chinese market is vast and growing fast, but access to that market is so restricted for foreign companies that few international data center operators have bothered to seriously invest in expanding there. The country’s protectionist policies have left the booming hyperscale market almost entirely for local data center providers to take advantage of, fueling explosive growth for old incumbents like China Telecom and China Unicom – they are two of the five largest colocation providers in the world, while operating in China exclusively – as well as new entrants, such as Chindata Group, which recently went public on the back of its success in roping in ByteDance, the hyperscale company behind TikTok that, according to Tan, leases more than 80 percent of Chindata’s capacity.

Whatever spark foreign data center providers had for tackling the massive China opportunity a few years ago has been extinguished by the Trump administration’s trade war, and multi-national operators’ eyes are now on other markets in the region. They no longer see a point in trying to operate in a country that’s been hostile to foreign businesses, when there are “other really high-upside growth markets in Asia, like India and Indonesia and Korea and Japan, that [are] really only starting to accelerate in terms of cloud adoption, in terms of internet usage, in terms of public cloud services, or even SaaS services,” Tan said.

Competition Heats Up in Japan

Of the emerging Asia Pacific markets, Japan is the largest. “In terms of absolute size, excluding the Chinese markets, I would say Tokyo is actually the largest market in Asia in terms of data center capacity – just because of how big the Japanese population and the Japanese market is.”

Japan has the world’s third largest GDP, yet there isn’t a domestic hyperscale cloud provider there, and both Chinese and American hyperscalers are now competing intensely for market share there, Tan explained. That competition has been playing out in Tokyo and Osaka.

Jakarta Comes Online

Jakarta, Indonesia’s largest population center and epicenter of its booming data center market, isn’t large in terms of data center capacity – at least not yet. Structure estimates it to have about 75MW of colocation capacity total. For the sake of comparison, Singapore, a top-tier Asian market, has nearly 500MW, while Tokyo, the largest data center market outside of China, has 780MW.

The Indonesia market is “very tiny, but that market could easily quadruple over the next three to five years, given… the amount of land banking that we’re seeing happening” there, Tan said.

Companies doing the land banking include K2 Data Centres and Keppel DC, both backed by Singapore-based conglomerates, and Princeton Digital Group, backed by the New York-backed private equity firm Warburg Pincus, he said. Other, larger data center players have been circling Jakarta, looking for ways to get in. “But it’s been such a hot market that valuations are sky-high, and companies that do have assets in those markets are asking for really high multiples,” Tan said.

India's Data Center Boom

India is a much larger data center market than Indonesia, but it’s still nascent, with all indications of a boom in capacity expansion. A number of international players have already entered the market by acquiring local assets, including Singapore-based ST Telemedia’s acquisition of the Tata data center platform, Japan telco NTT’s acquisition of NetMagic, and the acquisition of GPX carrier hotels in Mumbai by Equinix, the world’s largest data center provider.

Tan only expects this trend to accelerate, pointing out that Digital Realty, the world’s second largest data center provider, “has a gap in their map in Asia with India” that it’s likely looking to fill.

There are also new international market entrants, such as Bridge Data Centres, subsidiary of the aforementioned Chinese provider Chindata, and local conglomerates looking to leverage their local knowledge and assets to capitalize on the data center boom in India. One example of the latter is Hirandandani Group, whose data center brand is Yotta Infrastructure.

“There are a few local conglomerates in India that are kind of circling the data center space,” Tan said.

Listen to our interview with Structure’s Jabez Tan in full on the latest episode of The Data Center Podcast to learn a lot more about these new data center hotspots in Asia Pacific as well as the other corners of the world where the colocation market is booming (Apple Podcasts, Spotify, Google Podcasts, ). Structure's 2020: Global Data Centre Colocation & Interconnection Report available here.

Full interview transcript:

Jabez Tan, head of research, Structure Research on The Data Center Podcast

Produced by Yevgeniy Sverdlik, Data Center Knowledge

Yevgeniy Sverdlik, DCK:

Hey everybody. Welcome to the Data Center podcast by Data Center Knowledge. I am Yevgeniy Sverdlik, Editor in Chief at DCK. My guest today is Jabez Tan. He's head of research at Structure Research. Structure is a research company. They have this laser focus on the data center market. Jabez, thank you so much for talking to me today.

Jabez Tan, Structure Research:

Thanks for having me, Yevgeniy. Good to be here.

Yevgeniy Sverdlik, DCK:

Tell me how last year has been for you. You're normally traveling nonstop.

Jabez Tan, Structure Research:

Yeah, it's been a weird year. Typically, I'll be in Asia about four to six times a year, cycling across Japan, Singapore, Hong Kong, Australia, and some other new markets that we're trying to get into. But given what's happened last year, it's been purely a remote year for us. Usually in recessions, research tends to be the first budget that gets cut for a lot of companies, so we were a little worried heading into the pandemic.

Jabez Tan, Structure Research:

But it turns out that with a lot of people cooped up at home and working remotely, it's really good for research, because they only have time to read research and talk to analysts like us. So it's been a good year overall, but the event side has definitely taken a hit, to be perfectly honest.

Yevgeniy Sverdlik, DCK:

Structure, just put out their latest edition of an annual report on the global data center market. I just finished going through it or big part of it. We're going to talk about some of the most interesting bits in there. The global market has and will continue growing about 11% a year on average through 2025 according to what you guys project. It was a 54-billion market last year and you expect it to reach 92 million in '25. The big high-level takeaways for me or that A; hyperscale colocation is continuing to grow as a portion of the overall market. And B; much of the growth going forward is not going to be happening in places we're used to talking about, US and Western Europe.

Yevgeniy Sverdlik, DCK:

Let's start with the hyperscale bit. You guys stopped splitting the market like you used to into retail colo and wholesale colo. You're now talking about retail versus hyperscale. Can you explain your thinking here? Wholesale colo, that's not been leased by hyperscalers like Facebook or Google. Is still out there, that's still a product that exists. You do address it in the report, but just walk me through your thought process here, when you say hyperscale today, what does that mean?

Jabez Tan, Structure Research:

It's a great question and a lot of people... has a lot of vague definitions surrounding hyperscale. We used to call it retail versus wholesale colocation market because that was traditionally how the industry evolve, call it seven to 10 years ago when it was just retail, smaller deals and then wholesale deals that you would sell to large banks or large manufacturing companies. And then in come these large hyperscale cloud companies that are consuming lots and lots of IT infrastructure. And so we've really just renamed the wholesale piece to hyperscale.

Jabez Tan, Structure Research:

In the report, we break down the hyperscale colocation market into two main segments. The first segment is obviously the hyperscale segment, which is what you would include from AWS, and Azure, and Google, and Oracle and Alibaba, and those guys. And then the second section, which is a smaller piece that's not growing nearly as fast is what we call non-hyperscale wholesale. So it's basically wholesale deals that typically range from, call it 250 kilowatts to one megawatt-type deals.

Jabez Tan, Structure Research:

They are still coming from governments or financial institutions, manufacturing, logistics, some of the more traditional industries that are taking up what we traditionally call wholesale colocation. But the bulk of that segment, because of the growth and the size dominated by hyperscale, cloud players, we decided to just do a rename to call it hyperscale colocation market instead of wholesale. So that was the thinking behind that.

Jabez Tan, Structure Research:

That's going to be, I think, how the market's going to trend in the future. I think with retail, we've had to split retail into three different sub segments. So the big portion, which is the carrier-neutral piece that providers like Interxion and Equinix play in. Then you have the network provider-oriented piece, which is where a lot of the telcos sit within that section. So capturing what telcos are doing from a colocation standpoint, that's not growing nearly as fast as carrier-neutral given the world that we're pivoting in towards.

Jabez Tan, Structure Research:

And then the last is system integrators that are doing some level of colocation leasing as well, which is a very small part of that retail market. So we tried to simplify it and make it clear in terms of the segments that we're breaking up. But obviously, like you pointed out, Yevgeniy, the hyperscale piece is really what everyone's been talking about now.

Yevgeniy Sverdlik, DCK:

The most... Or not the most important, but the most exciting part of this report is the colocation leaderboard. For 2020, you have top 15 providers on a global basis. Those top 15 account for about half of the market. Does that mean there's a lot of consolidation left to do? Consolidation has been nonstop in this market for the last few years. Half of the market is still very fragmented, lots of small players.

Yevgeniy Sverdlik, DCK:

That's the first question is, do you expect a lot more consolidation to happen? Those top 15, will their share grow much beyond the half of the market that you're assessing right now?

Jabez Tan, Structure Research:

That's a great question and I think the shorter answer is yes, we do expect more consolidation to happen. I think it's going to vary based on the regions. So if you look at the US, that's probably the most mature region in the world. Even in the US we've seen quite a bit of consolidation take place in 2020. You had Equinix with that big acquisition that the Bell Canada data center portfolio.

Jabez Tan, Structure Research:

Canada has really been a big focus for a lot of providers in 2020 given how it has accelerated in hyperscale growth and markets like Montreal and Toronto have really become front and center and being the conversation that's major tier one markets. So I think, yeah, moving forward, in more fragmented regions like Europe and Asia, and especially Asia, I think you'll start to see more and more consolidation take place. That has already been happening as we've covered the market over the last five years. We do expect that to accelerate given the amount of investor interest.

Jabez Tan, Structure Research:

And APAC has always been a market or a region with some really high upside markets that have yet to reach their full potential. They're still very early innings, we think in their growth phase. And so you've got markets like India and in particularly markets like Mumbai, and Chennai, and Pune, and Hyderabad, huge addressable markets, but with very, you can argue very low penetration from a data center capacity and hyperscale cloud standpoint.

Jabez Tan, Structure Research:

I know others very similar markets that have that upside potential in Asia, include Indonesia and Korea as well. Japan was... I think if I would have named one of the hottest market in Asia in 2020, it'd probably be the Japan market.

Yevgeniy Sverdlik, DCK:

And the top five players you identify are Equinix, Digital Realty, China Telecom, NTT, and China Unicom. Looking at the top 15 ranking in recent years, have there been any major changes?

Jabez Tan, Structure Research:

Yeah, I think Digital Realty and Equinix were smaller in the past few years and they've grown a lot bigger due to the consolidation plays that they've done. Like in Digital Realty, the Digital Realty number, which now includes the Interxion business, and that's a huge acquisition that took place in 2020 that is now closed and now part of that Digital Realty group. So I think Digital Realty and Equinix built on their market leading position.

Jabez Tan, Structure Research:

China is an outlier just because of how large the Chinese market is and how restrictive it is for foreign companies to do any sort of IT infrastructure services business in China without any sort of JV structure or they call it the VIE Structure. So it's a skewed leaderboard just because a lot of the companies in China like China Telecom, China Unicom, China Mobile, GDS, most of them are deriving the majority of their revenues from colocation in China.

Jabez Tan, Structure Research:

So it's not exactly like they have a huge global business, but just how huge the Chinese market is. And that's a testament to just that addressable market.

Yevgeniy Sverdlik, DCK:

But in terms of ranking, have there been any changes on that top 15?

Jabez Tan, Structure Research:

I wouldn't say not very much. I think you see the typical players that you would expect on there. I would say, GDS has moved up in the rankings given how fast it's grown as the carrier-neutral hyperscale player in China. 21Vianet has also grown into the ranks given it's recently pivoted from being a retail business into more hyperscale-looking business, like a GDS. And then you had some acquisitions done by CyrusOne over the last couple of years. And then Global Switch being a player in Europe and Asia.

Jabez Tan, Structure Research:

They've continued to slowly build out capacity across all these tier one markets. NTT GDC, I think also has risen in the ranks over the last couple of years. You've seen them make some big bets in terms of acquiring the e-shelter business in Europe, they've acquired the RagingWire business in the US. Then before that, they were one of the first two to enter India with the Netmagic acquisition. And then in 2020, they really started to form this separate entity called NTT GDC, which is their global data center business arm, brought in a lot of seasoned executives in there.

Jabez Tan, Structure Research:

So they're really one of the few outlier telcos in the world that have chosen to go the opposite path. Whereas most telcos are trying to divest their data center assets, take advantage of the high multiples and valuations for data centers. Whereas NTT is doubling down, and buying, and acquiring, and building out more of that hyperscale data center practice.

Yevgeniy Sverdlik, DCK:

And I want to talk a little bit about the protectionist policy in China and how difficult it's been to do business there for foreign companies. Has it been even harder to compete now there, especially for US companies following Trump's trade war?

Jabez Tan, Structure Research:

Just to preface it, to begin with there wasn't much of a footprint from US companies in China from a colocation standpoint to begin with. You had Equinix way back, I think seven years ago, they bought the Asia Tone data center business, and that included some assets in Shanghai that they're still running, but it's not a meaningful part of their business. And outside of that, you have other telcos like Telstra that bought the Pacnet business that did have some colocation assets in tier one markets in China as well.

Jabez Tan, Structure Research:

But outside of that, it's been very quiet in terms of foreign companies or out Western companies doing a meaningful amount of data center expansion within China. So it's mainly been a locally dominated market by the telcos and by the big care neutral players in town. That's how you've seen a resurgence in more of these Chinese colo startups like Chindata that recently IPOed. 80 plus percent of their business is leasing hyperscale capacity to ByteDance, and that's speaking to how large some of these large Chinese content and media and tech companies are. But yeah, like you said, very close market, very tough for foreign companies to get it.

Yevgeniy Sverdlik, DCK:

And what's been your impression of the stance that foreign data center providers have taken on China? Is it similar to the stance of some tech giants like Facebook who's decided it's just not worth it and pulled out of China altogether? Is this something they're actively exploring, getting more involved there? Because it's such a huge market, as you said, and they have the chops to deliver.

Jabez Tan, Structure Research:

Yeah, I think I would say back in 2017/2018 from the research standpoint, we had a lot of requests on China, call it two to three years ago. That was because at that point you just identify, which is, people saw that market, huge population, huge addressable market, huge digital shift from a lot of the, both urban and rural populations to consume cloud services and content and media. But that has interestingly cooled off over the last couple of years.

Jabez Tan, Structure Research:

So within the 2019/2020 timeframe, we've seen a pivot from investors and providers to focus on other markets outside of China, because they're looking at Asia and they say, "Why are we spending so much time and energy trying to get around this "Chinese firewall" and try and operate in a country that's pretty hostile to foreign companies?" There's other really high upside growth markets in Asia like India, and Indonesia, and Korea, and Japan. It's really only starting to accelerate in terms of cloud adoption, in terms of internet usage, in terms of public cloud services or even SaaS services.

Jabez Tan, Structure Research:

And I think a lot of those providers have pivoted to these other markets in APAC as a way to capture growth from Asia instead of just going directly into China, given... If the largest hyperscale companies like Apple, Google, Facebook, like you mentioned have difficulty doing meaningful amount of business in China, I think for a data center operator, that's going to be even harder given that they're operating very sensitive, mission-critical infrastructure. And then you need specific licenses in China for operating data centers, and running cross connects, and doing interconnection business.

Jabez Tan, Structure Research:

So I think a lot of those barriers to entry in China have made them shy away from pursuing the Chinese market as aggressively as other markets, I would say.

Yevgeniy Sverdlik, DCK:

To put it briefly, the trade war hasn't had any effect on activity there because there wasn't a lot of foreign activity in the data center sector there to begin with.

Jabez Tan, Structure Research:

Yeah. I think number one, there wasn't that much activity, and number two, it definitely didn't help to increase the appetite. So I think that trade war has spilled over more concerns actually in "more neutral" markets like Hong Kong, where Hong Kong was seen as this very neutral democratic Chinese-owned state in Asia. And then recently with the new security laws enacted by China and Hong Kong, that has made a lot of large tech companies very concerned about their infrastructure footprints in the Hong Kong market.

Jabez Tan, Structure Research:

And also that's why you've seen Singapore grow a lot faster in 2020 because of a lot of that shift, not just on Western companies prioritizing Singapore expansion more, but also Chinese companies are making Singapore their APAC or regional headquarters given there's some hostility for Chinese apps in India. And Singapore is a natural place for them given Malaysia, Indonesia, all very high growth markets with meaningful amounts of Chinese-speaking population [crosstalk 00:16:39]-

Yevgeniy Sverdlik, DCK:

So Hong Kong and Singapore have traditionally been competing to be the center for infrastructure, at least for digital infrastructure in Asia. And so now given the politics in Hong Kong, Singapore has taken the lead basically. Am I understanding that correctly?

Jabez Tan, Structure Research:

Yeah. I think the best way to put it is, Singapore has always had the lead. I think it was always the number one market and Hong Kong was a very close second market. But with the chain of events that has happened over the last 12 to 18 months, I think Singapore absolutely pulled ahead as the number one regional hub in Asia-Pacific. That's from a perception standpoint, but in terms of absolute size, excluding the Chinese markets, I would say Tokyo is actually the largest market in Asia in terms of data center capacity, just because of how big the Japanese population and the Japanese market is.

Jabez Tan, Structure Research:

Third largest GDP in the world with no domestic hyperscale cloud has led to this big competition of both Chinese and Western hyperscale clouds deploying in Japan to get that market share and compete for a lot of the Japanese business in that country. So we've seen a lot of activity and growth in, not just Tokyo, but in Osaka as well.

Yevgeniy Sverdlik, DCK:

Let's go to the opposite end of the spectrum, Latin America, that market is tiny compared to the other three regions, just North of half a billion. But also you guys expect it to grow the fastest annually. Can you flush that out a little bit? Why is that happening, this fast growth in Latin America? Is it simply a product of digital transformation gradually taking hold?

Jabez Tan, Structure Research:

The first thing to note is that the revenue base from Latin America, it's very small compared to the other regions, and so that's why the growth rate is the fastest. So if you look at it from an absolute revenue addition standpoint, it's still relatively modest compared to the other regions, but the growth rate, yes, it is the highest growth rate in the world in terms of regional standpoint. And we're seeing that growth rate because we're seeing increased investments from not just local players in the Latin America market, but global providers also making mean for acquisitions and expansions in Latin America.

Jabez Tan, Structure Research:

So you have the biggest one, which is the Digital Realty acquisition of Ascenty in Brazil. And then you have CyrusOne investing in ODATA, which is another Latin America data center platform. You have companies like Edge Connect that are building hyperscale data centers for these large cloud companies in markets like Buenos Aires and Chile. So yeah, I think the Latin America market is one that we've been getting an increased amount of requests about. It's not a market that we've typically specialized in as a firm, given our roots in North America and APAC. We've got an analyst team in Europe.

Jabez Tan, Structure Research:

So we've been mainly focused on those three main regions and we've, I guess you can call it in all fairness, neglected Latin America to some extent. We've been keeping our eye on it and we'll likely wrap up our coverage on that region over time given a lot of the global companies that we work with as a research firm are targeting that area of growth as well.

Yevgeniy Sverdlik, DCK:

Now, back to APAC, it's already the largest data center market in the world, 24 billion in 2020, according to your guys' estimates. You expect it to grow the second fastest rate after LATAM, 14% a year. And as you just explained, even though it's the second fastest growth rate in terms of actual revenue added, it's vastly bigger than Latin America. And interesting thing there is the fast growth rate is driven by India and Indonesia. So what's happening in those two countries? What's causing all this growth there?

Jabez Tan, Structure Research:

Indonesia is where we've been spending a lot of our time on lately in 2020. Indonesia was actually the only new market that we added to our research deep-dive report series in 2020, and that's because we've seen a lot of activity in the Indonesia market. So I think we have our estimates at... The market is not big right now, the Jakarta market, which is the hub of Indonesia is, call it 75-ish megawatts of capacity total in that market of colocation space. Which is not a lot if you compare it to other markets like Singapore with like over 400, almost 500 megawatts and Tokyo with 780 megawatts of capacity.

Jabez Tan, Structure Research:

So it's very tiny, but that market could easily quadruple over the next three to five years given the amount of activity that we're seeing, the amount of land banking that we're seeing happening in the Indonesia market. So we're very bullish on the Indonesia market. And then you have India as well that's also very nascent in terms of international companies expanding within that market. So you had some activity in India over the last two years, you had ST Telemedia acquiring the Tata data center asset platform, call it one, two years ago.

Jabez Tan, Structure Research:

And then you had, I mentioned earlier, NTT buying Netmagic. Ten Equinix recently in 2020 acquired the GPX carrier hotels in Mumbai. And so I think that is going to only accelerate the amount of interest and expansion activity in that market. Digital Realty, another global player that has a gap in their map in Asia with India, they're going to likely make some moves in that market as well.

Jabez Tan, Structure Research:

And then you also have new market entrants like the Chindata group, which is essentially a roll-up of the Chinese business, which has Chindata, and also the Pan Asia business with Bridge Data Centres, which was all... they were both backed by Bain Capital. Bridge Data Centres had a footprint in Malaysia and they're also building a large data center campus in Mumbai, in India as well. So that activity is happening. You have Colt, which is a provider that looks like Global Switch with very solid hyperscale data center assets in Asia and Europe.

Jabez Tan, Structure Research:

They're also building 100-megawatt data center campus in Mumbai. So that market is going to take off for sure over the next, call it two to four years. So we're very bullish on the [crosstalk 00:23:04]-

Yevgeniy Sverdlik, DCK:

And there's some local investors, right? There's a YODA and another player, and that's funded by Indian billionaire investor.

Jabez Tan, Structure Research:

Yeah. I met the YODA guys at PTC last year, so yeah, they've been pretty aggressive in expansion in India. It's always a good recipe for success when you have a local conglomerate backing a data center platform expansion in a high growth market, because typically, in India, the big barrier to entry in India has always been the acquisition of land and the power resiliency of the grid. And so with power resiliency, you can always build to end to get it to a more resilient architecture.

Jabez Tan, Structure Research:

But whereas the land acquisition has always been the big issue for international companies expanding in India. I think YODA infrastructure being backed by a large conglomerate with access to local relationships and land banking bodes well for their, I think future prospects in India as well. So yeah, I think there's a few local conglomerates in India that are circling the data center space. So yeah, I think we can expect more and more investments that come from these large traditional real estate conglomerates that are pivoting more to digital infrastructure assets.

Yevgeniy Sverdlik, DCK:

To go back to Indonesia, you said there was a lot of land banking. Who's doing the land baking? Who's driving all the investment there? And why in Indonesia?

Jabez Tan, Structure Research:

Indonesia has probably one of the larger populations in Asia-Pacific outside of India and Japan, if I'm not mistaken. So it's got really high upside as a lot of the... with a relatively low internet penetration rate and low mobile adoption rate relative to other more mature Asia-Pac markets. And then you have the presence of hyperscale like companies in India that are starting to really accelerate and grow. So you have Gojek, which is basically like the Uber of Indonesia is becoming large enough to be hyperscale status in terms of the amount of capacity and cloud services that they're taking up.

Jabez Tan, Structure Research:

But yeah, I think the providers that we see in land banking in that market include the Coop Group, which not many people I've heard of the Coop Group or their data center arm is called K2 Data Centres. They've initially started by catering to hyperscale demand in the Dublin, Ireland market, so it's a weird initial market entry because they're a Singapore-base conglomerate that decided to start in Dublin, Ireland for our data centers. And they've identified Indonesia or Jakarta specifically as their second market to expand into. So they've been land banking in that market.

Jabez Tan, Structure Research:

You have the Princeton Digital Group, which is backed by Warburg Pincus and they're a combination of a lot of senior executives from Tata, from Singapore data center companies, from ex AWS guys that are running that company and building a Pan-Asian platform, not just in Indonesia, but they're looking at India, they have assets in Singapore and China as well. So those are some of the companies that are non-local to Indonesia that are starting to expand. And then you have Keppel, which is a very known entity in the Singapore market that's building data centers there as well.

Jabez Tan, Structure Research:

And there's also been rumors circulating across the market of other larger data center operators looking at the Jakarta market and trying to find a way to enter that market as well. But it's been such a hot market that valuations are sky high and companies that do have assets in those markets are asking for really high multiples, as you can imagine.

Yevgeniy Sverdlik, DCK:

And third in growth rate on your growth rate ranking, I guess, is India, which is a huge region, lots of different markets. They're nine billion in 2020 overall, annual growth rates, 12-and-a-half percent through 2025. Where is the most growth happening in that region now? We know others, they're the well known big markets there, the Frankfurt, London, Amsterdam, Paris. Looks like there's a lot more activity now in Eastern Europe, in Africa as well. Can you talk a bit about that region, what's happening there?

Jabez Tan, Structure Research:

Yeah, absolutely. The reason why APAC is growing the fastest is because it has tier one markets and also tier two, tier three markets that really should be tier one markets like we've mentioned India and Jakarta, Indonesia as well. Europe is a little bit different because the whole region is a little bit less fragmented than Asia, but still more fragmented than the North America market. So a lot of the markets are... the growth disparity or the, or the maturation disparity between European markets is less pronounced than in Asia.

Jabez Tan, Structure Research:

And so we continue to see the flat markets, like you mentioned, still continue to exhibit really strong growth. So we've seen really a lot of expansions coming online, increased pipeline for new builds in markets like London, Paris and Amsterdam, which I'm working on a report as of now, and Frankfurt as well, has seen a lot of M&A and expansion activity, and also big signings. So I think Iron Mountain signed a 27-megawatt lease with a hyperscale cloud in 2020.

Jabez Tan, Structure Research:

So I think those four markets will continue to exhibit very strong tier one market growth. But then you have these tier two markets that are not that far behind these tier one markets. So the markets that I would keep an eye on in 2021 are markets like Warsaw, which is in Poland, you have Milan in Italy, you have Zurich in Switzerland, you have Madrid in Spain. And then on the Eastern European side, you have Moscow in Russia that's also exhibiting a lot of growth from a data center standpoint, primarily driven by Chinese platforms, given that they're closer towards the Asia-Pacific region then than most European markets.

Jabez Tan, Structure Research:

But yeah, I think those markets, I would definitely keep an eye on in 2021, and there's been a lot of already announced builds an M&A expansion activity and those tier two European markets.

Yevgeniy Sverdlik, DCK:

So Asian platforms like Alibaba and Tencent expanding in Russia?

Jabez Tan, Structure Research:

And Huawei too, so all the big Chinese platforms are making their way into Central and Western Europe through the Eastern European region. And Russia is the hub for that.

Yevgeniy Sverdlik, DCK:

And politically, they have much smoother relations with Russia than they do with the West, so, like you say, it's logical.

Jabez Tan, Structure Research:

That's right.

Yevgeniy Sverdlik, DCK:

North America, second largest market after APAC, 20 billion in 2020. But the slowest growing. As you mentioned, is the most mature. Under 7% annually, you guys estimate. First, when did APAC overtake North America in market size?

Jabez Tan, Structure Research:

We've had to revise our projections over the years, but in terms of pure data center capacity market size, the APAC region surpass the North America region in 2019. But in terms of revenue, which is a function of pricing as well, the North America market was eclipsed by APAC back in 2018, given it is the most mature market and therefore pricing is the most compressed or the lowest in the most mature region. So yeah, the APAC region has for a while been bigger than the North America market and we've had to revise those projections over time.

Jabez Tan, Structure Research:

We initially thought that would happen in 2020, then 2019. And actually, based on what we're tracking from more publicly disclosed data, and revenue data, and expansion data from these both private and public players, it's actually a much larger market than we expected, the APAC region.

Yevgeniy Sverdlik, DCK:

So why is North America growing so slowly? I know market maturity, so is this a simple story, basically, there's pretty much enough capacity already built to match the demand and that's why there isn't so much happening or is there something else going on?

Jabez Tan, Structure Research:

I think because the North America market grew the fastest in the beginning that it only makes sense that it plateaus, is the first market to reach a plateau stage. So it's a function of several things. I think you have tier one markets in North America that all developed roughly at the same time. And then North America is interesting because in Europe you have flat, which are all very big markets that are generally, you can say in that same size range. But in North America you have Ashburn and then you have everyone else, which is...

Jabez Tan, Structure Research:

Ashburn or Northern Virginia is by far the largest market by a mile in North America followed by other "tier one markets" like Dallas and Chicago, Silicon Valley and New York. You're familiar with those tier one markets. But it's a function of several things. So I think you have a lot of the hyperscale cloud, so Google, Microsoft, Amazon, that's whole base for them, North America. And so they can very easily build their own data centers in North America outside of these tier one markets.

Jabez Tan, Structure Research:

So they built large campuses in Ohio, and in Kansas, and in some of the more remote regions, because they have access to land, they have access to cheap power, they have access to renewable energy. And so that has taken away, if you will, some of that addressable market for colocation because these hyperscalers are building a lot of these large campuses themselves outside of tier one markets. And that's why the tier one markets have grown so much from a colocation standpoint, is because the hyperscalers don't want to... The economics doesn't really work for these hyperscalers to invest a ton of CapEx to build hyperscale sites into our markets.

Jabez Tan, Structure Research:

They would much rather lease from colocation providers like Digital Realty, or CoreSite, or CyrusOne, or Equinix in these tier one markets, just because there's already so much competition, there's so much... The pricing landscape is really favorable to them because there's so many providers competing for their business. And so I think they've chosen to primarily lease in these tier one hubs in the US. But I think that the US market will continue to find these tier two growth markets, they are starting to emerge, so markets that we are pretty bullish on that's outside of your "more well-known tier one markets" are I think two that I would single out or maybe three.

Jabez Tan, Structure Research:

I would say Atlanta, which is no surprise to many people. People consider it already a tier one market. But yeah, Atlanta will absolutely be in the conversation for tier one market status, same with Phoenix, if not already. And then Hillsborough or Portland is also another really interesting high upside market for us because it has very favorable tax incentives, sales tax climate. It's got a proximity to Silicon Valley and other very mature West Coast tier one markets.

Jabez Tan, Structure Research:

And on top of that, it's also got submarine cables that are landing in Hillsborough that are connecting directly to Asia-Pacific markets, which is, I think that the key here is because this industry is becoming very much a global infrastructure phenomenon that you really need to have international connectivity to be successful as a market. And so I think Oregon or Hillsborough really checks a lot of those boxes for growth. Salt Lake City's another ones that has flown under the radar, but has seen a lot of hyperscale activity, given again, as alternative to Silicon Valley.

Jabez Tan, Structure Research:

Phoenix has also emerged as an alternative to Silicon Valley and Las Vegas is, you can argue somewhat of an alternative. But I think Salt Lake City will also be another Phoenix to emerge to cater to hyperscale [crosstalk 00:35:25]-

Yevgeniy Sverdlik, DCK:

Really?

Jabez Tan, Structure Research:

Yeah. Minneapolis as well. I think we've heard a lot of interesting growth stories from the Minneapolis market.

Yevgeniy Sverdlik, DCK:

And in all these, I guess, emerging markets in North America is it the hyperscalers that are driving all the growth? Hyperscaler is the reason that they're becoming alternatives to the top tier markets?

Jabez Tan, Structure Research:

Yeah, I think it's a combination of hyperscalers, which includes cloud, and content, and digital media, so it's not just the Amazon, it's also the Facebooks of the world that are also doing that. So yeah, I would characterize it primarily as driven by hyperscale growth, just because the hyperscale cloud players have essentially become aggregators and they're aggregating all this need for compute storage, networking capacity into a single platform.

Jabez Tan, Structure Research:

So it makes less sense for individual enterprises and organizations to procure one or two racks of colocation capacity when they can spin up and spin down IT capacity on a hyperscale cloud platform that has a lot more features and capabilities than they would have done if they were to do it by themselves. So I just think that it just makes a lot of sense for hyperscalers to be driving a lot of that IT infrastructure procurement in North America, given the dynamics that are taking place.

Yevgeniy Sverdlik, DCK:

I want to talk a little bit about the interconnection portion of your report, the interconnection market size, which you address there. You guys count physical and virtual cross connects, do you consider them equivalent? Aren't virtual ones cheaper and lower capacity?

Jabez Tan, Structure Research:

Yeah, I think that was the perception in the past that physical cross-connects would continue to be the primary driver of growth because they're very stable, they're dedicated, they're physical, which is something that you can touch and feel with an ethernet cable. And then virtual cross-connects started off as this DR Option or bus test dev option where you could, if you want it to test some connections or have a test dev workload that you want to test before you transitioned that into a physical cross-connect, you can spit it up on a virtual or SDN platform and then transition that into physical cross-connects once that workload becomes more stable, and repeatable, and scanning more traction.

Jabez Tan, Structure Research:

So that was the initial thought of how virtual cross-connects would work because of capacity limitations in the beginning. I think when it first started out, you can only... the bandwidth capacity was like sub one gigs per second of capacity for virtual cross-connect. Whereas with a physical cross-connect, you can go up to like 100 gigs of bandwidth capacity. But fast forward to today, and we're seeing a meaningful shift in the way companies and providers think about virtual cross-connects.

Jabez Tan, Structure Research:

We're seeing that they're expanding the amount of bandwidth capacity for virtual cross-connects, I think it's now up to 10 gigs of capacity for a virtual cross-connect that you can provision through one of these platforms. And the feedback that we're getting from a lot of these SDN platform companies is that companies are not... a lot of enterprises and customers are now using virtual cross-connects for production workloads, which is not what they were seeing, call it two years ago when it first started coming onto the market.

Jabez Tan, Structure Research:

So I think we're seeing a meaningful shift in that a lot of enterprises do like the codification of the network, which is essentially what virtual cross-connects are. And they do like the ability to spin up and spin down on-demand, self provisioning, not having to wait for engineer or assist admin to go to the data center rack, and plug into ethernet cable, and connect it to the other networking switch. So I think that that's going to be an interesting dynamic that we'll continue to monitor moving forward. But I think it bodes well for both physical and virtual cross-connects growth in the future.

Yevgeniy Sverdlik, DCK:

Equinix owns the bulk of the physical and the virtual cross-connect market. Help me understand Equinix's role in the virtual cross-connect space. They've been trying to interconnect all their facilities across the globe recently, and the promises to eventually give you this virtual instant any site to any site connectivity. With much of the interconnection ecosystems at Equinix facilities already as they have been, doesn't that kill the value of the likes of Megaport console connect, the other big players?

Yevgeniy Sverdlik, DCK:

They're big players in the virtual cross-connect, virtual interconnection, but they don't operate any physical facilities of their own.

Jabez Tan, Structure Research:

Yeah, I think that's the reason why Equinix has such a big market share overall, is because they don't only own the platform, but they also own the data centers and the ecosystems that reside within the data center. And if you are a customer and you're going, "I need to provision cross-connects and buy colo capacity," and Equinix has to become that one-stop shop for everything. Whereas if you wanted to work with Megaport, you would have to first go through a colo provider to procure colocation capacity, and then work with Megaport to establish that virtual cross-connect into their SDN platform.

Jabez Tan, Structure Research:

So it's a little bit of a barrier to entry given that this multiple steps and multiple vendors that they have to deal with to get that up and running, whereas Equinix has to become that one-stop shop and continue to build on that value proposition with the acquisition of Packet, which is a automated, bare metal provisioning platform, which addresses a different niche in the IT infrastructure space. So it's not colo, it's not cloud, but it's very high performance dedicated server infrastructure that you can spin up, spin down on a cloud like basis, even though it's not cloud per se.

Yevgeniy Sverdlik, DCK:

Okay. Global Switch, based in UK, owned by Chinese investors. There's a rumor that it's on the market. May sell for as much as 11 billion, which would be like the next jumbo M&A deal in the sector. You guys estimate is the sixth largest caller provider in the world. I'm just curious, who do you think may be interested in buying it? Equinix and Digital would be interested, I think, but they own so much of the market already. They probably couldn't get antitrust approval for something like that.

Yevgeniy Sverdlik, DCK:

Would it be another operator, or an investor, or a group of investors like a lot of the deals that we've seen recently? My best guess would be either someone like NTT or one or more of these infrastructure funds. So what do you think?

Jabez Tan, Structure Research:

That's a great question, and we've been falling global switch for a while. And they're a very unique data center operator because they typically only do wholesale hyperscale deals, but they have very highly interconnected assets in certain parts of Europe and Asia. So I know that their London asset is very highly interconnected. They own one of the carrier hotels in Singapore, the top two carrier hotels in Singapore, and they own on a very highly interconnected asset in downtown Sydney.

Jabez Tan, Structure Research:

But they sell primarily wholesale and hyperscale, which is odd because typically when you own carrier hotels, you tend to sell retail like what Equinix does to get that juice from that ecosystem density. And so I think, yeah, there'll be a lot of providers and investors that will be interested in acquiring Global Switch. I think from a best fit standpoint, CyrusOne sticks out to me as being a very good fit for Global Switch because they are very much lacking in Asia-Pacific presence, even though the acquired Zenium in Europe to bolster their European presence.

Jabez Tan, Structure Research:

But they're really lacking in Asia-Pacific footprint as a publicly traded company. So I think from a data center footprint fits that point, I think CyrusOne could be a potential acquirer. I don't think CoreSite will acquire them, given CoreSite just seems to be primarily focused in the North America region for now. There's really no chatter of them going outside of North America or the US market for that matter. But ultimately I do think it's more plausible that a PE... like infrastructure investor will acquire the platform, given that they're typically willing to pay a much higher multiple for a platform like Global Switch.

Jabez Tan, Structure Research:

So CyrusOne, given they're publicly traded, they have to be relatively conservative in not overpaying for platforms like Global Switch, whereas for infrastructure investors, because they have a much longer time horizon, much lower appetite for yield on these assets that they can afford to splurge at a much higher multiples. Which is what you saw from Macquarie or MIRA when they acquired the majority stake in AirTrunk at the end of 2019.

Jabez Tan, Structure Research:

So it's really these infrastructure funds that are really able to shell out the capital and acquire platforms like Global Switch at a much higher premium, call it 28, 30X EBITDA is the market rate for very attractive data center assets, maybe even more.

Yevgeniy Sverdlik, DCK:

Okay, Jabez, that's all I have. Thank you so much for your time.

Jabez Tan, Structure Research:

It was great speaking with you again, Yevgeniy, and happy new year.

Yevgeniy Sverdlik, DCK:

Same to you.