According to a recent report by IHS, global multi-tenant data center (MTDC) revenues grew 4.7%, as measured in USD, in Q2 of 2015 compared to the same quarter of 2014. Accounting for currency effects, growth is much higher given that the weakening Euro dragged on revenue in EMEA. However, if assessing the market in terms of space added, which grew by 90,000 square meters in just one quarter, it is quite clear that the MTDC market is a fast paced one with strong potential for future growth.
Helping to drive movement to colocations is the opportunity for interconnection, or cross-connects, among tenants. This is where physical cables are used to make direct connections between different customers and/or carriers within a data center. This reduces latency and costs given that communication does not have to go through an outside Internet Service Provider (ISP). IHS currently estimates that slightly under 10% of all multi-tenant data center revenue comes from cross-connect fees.
Retail colocation data centers, in particular, find their ability to offer direct cross-connects between customers to be a driver for not only new customers but also increased revenue per kilowatt from existing customers. It is a way for these companies to differentiate and increase revenue from existing tenants without having to invest in more space or power. However, the appeal of a data center dense with customers ripe for cross-connects eventually leads to more customers wanting to collocate at the same campus, therefore requiring more investment.
The ability to directly connect with a company’s peers in its own industry has created vertical-specific data center environments. For example, in London, Frankfurt, and New York many financial institutions group in certain data centers to more efficiently make trades and link to exchanges. In California, there are data centers geared towards digital media companies that use cross-connects to deliver content to partners within the same facility.
The ability to offer a deep interconnection environment is a major barrier to entry for new vendors because it requires a diverse network of carriers and a large data center with a robust tenant list with which potential customers see value in peering. This kind of business can take years to build, which is why colocation companies with major interconnection ecosystems are particularly appealing as potential acquisition targets. Digital Realty spoke frequently on its recent earnings call about the attractiveness of Telx’s interconnection business when looking for a partner in the retail colocation space. It was reported that Telx’s top-line revenue growth was at a 20% CAGR, while interconnection revenue was growing even faster.
IHS expects that revenue from interconnections, or cross-connects, will account for a growing share of recurrent revenues in the multi-tenant data center market and help drive differentiation among providers, therefore protecting against potential commoditization of colocation services.