Amid the consolidation in the data center industry, Equinix and Digital Realty continue to grow through acquisition, solidifying their leadership positions in key segments of the Internet infrastructure market.
Last week Equinix agreed to pay $3.6 billion to acquire 29 data centers from Verizon, a deal that will boost its position as the leader in colocation and interconnection markets, including key gains in Latin America and secure hosting of U.S. government IT assets.
The ongoing merger mania is creating opportunities for growth for a broad range of companies in the sector, even as the strong growth of cloud computing attracts unprecedented levels of investment capital.
As is often the case in the data center market, Equinix and Digital Realty are both rivals and partners. Equinix is one of the largest tenants for Digital Realty, which has built some of its data centers.
We recently checked in with both companies to discuss the data center market and the road ahead – including the potential for more acquisitions.
Equinix-Verizon: Strategic & Global Benefits
Equinix is no stranger to major acquisitions. In 2009 it acquired Switch and Data, its leading rival in the interconnection space. In has also made several deals to expand its international footprint, buying ALOG in Brazil, Bit-Isle in Japan and TelecityGroup in Europe.
The Verizon portfolio offers a range of strategic and geographic benefits, according to Karl Strohmeyer, President of Americas for Equinix. Our initial coverage of the Equinix-Verizon deal noted that the deal boosts Equinix’ presence in the government market and Latin America. In a discussion this week, Strohmeyer expanded on those and several additional areas where the Verizon portfolio may help Equinix.
- Government IT: Verizon hosts substantial operations for the U.S. government and military at its two largest campuses, the NAP of the Americas in Miami and the NAP of the Capital Region in Culpeper, Va. “Lately we’ve seen an acceleration of the government’s interest (in Equinix services),” said Strohmeyer. “I think this acquisition accelerates that in a very significant way.” He said these benefits extend beyond those two facilities to other Verizon sites. “In those facilities, (government tenants) represent key deployments for Verizon. Picking up Verizon as a customer has pretty strategic benefits for us over the long run. That relationship is very strategic, so there’s an obvious driver to maintain those deployments.”
- Latin America: A key geographic benefit is the acquisition of the NAP of the Americas and a facility in Sao Paulo, Brazil. “The NAP (of the Americas) is a gateway that serves data to 150 countries,” said Strohmeyer. “It’s an excellent opportunity for us to continue to grow.” He said Brazil is becoming an important market for Equinix, and the Verizon assets reinforce its position in that country. “We purchased ALOG, and that’s been operating four data centers,” he said. “We’ve seen really good traction in that market, despite the political and economic headwinds we’ve all been reading about. The interconnection value will be very impressive. Sao Paulo is the interconnection hub in that market.”
- Additional U.S. Capacity: Equinix will boost its footprint in a number of U.S. markets, adding one new city and additional capacity in several other key markets. At the top of the list is Houston, the energy capital of the U.S., where Equinix had no sites. “Houston has been a blue dot on the map for a long time,” said Strohmeyer. “We’ve seen good traction in the oil and gas industry, but having a data center in Houston will help in that sector. There’s also available capacity in many of these markets.” That includes Santa Clara, where the former Terremark site has been expanded and can accommodate more customers. “We will tether that to our Silicon Valley campus, and that will probably defer a phase of new construction on SV10,” said Strohmeyer. The same is true in Miami, where the NAP of the Americas has an entire floor available for development. “A really nice set of sites in the Denver market also come with this deal,” he added.
Equinix has been a key beneficiary of the shift in enterprise computing from on-premises data centers to cloud computing platforms. Many of the early business has come from cloud-centric early adopters seeking colocation space with cloud connectivity. Strohmeyer says adoption is extending to enterprises themselves, who are rethinking how they deliver IT services to take advantage of cloud technologies.
“Cloud is forcing a re-architecture of enterprise IT,” said Strohmeyer. “It’s disrupting how every enterprise IT architect thinks. It’s a compelling event that gives us a foot in the door. Enterprise is our fastest-growing customer segment, and I think that will continue. We believe hybrid multi-cloud is the platform of choice. We think we’re in the early innings of that trend.”
Equinix will be busy closing the Verizon deal and integrating the new facilities into its network. But it will also continue to track the constantly shifting acquisition landscape in the data center industry.
“The dots on our map are guided by where our customers want to be,” said Strohmeyer. “We look at that all the time. We have a privileged position. We can have conversations with our customers to understand the opportunities. And we’re constantly watching our competitors.”
Strohmeyer doesn’t anticipate an expansion of the company’s focus on colocation and interconnection to target the fast-growing market for wholesale data center capacity.
“I think it’s difficult to be a wholesale REIT plus a highly-connected cloud node,” he said. “There are tensions that come into play in trying to do this. We’re not going after wholesale.”
Digital Realty Builds on the Connected Campus
Digital Realty comes at the consolidation in the data center industry from another direction. The company popularized the wholesale data center model, leasing entire turn-key data halls. It has been a serial acquirer of data center properties, and has also made several moves to acquire entire portfolios, such as its deals for Sentinel Data Centers in 2009 and 365 Main in 2010. Last year, Digital Realty bought an eight-building portfolio in Europe from Equinix.
But the biggest deal by far has been the $1.9 billion acquisition of Telx in 2015, which accelerated Digital Realty’s push into the market for colocation and interconnection services, where Telx was the second-largest player behind Equinix. For Digital, the addition of Telx brought critical mass to its “connected campus” strategy that brings together real estate and network services.
“We think it would have taken three or four years to build this product,” said Chris Sharp, the Chief Technology Officer of Digital Realty, who acknowledged that wholesale and retail colo are “two very different products. Telx brought us a lot of thought leadership, systems and infrastructure. It also put a kind of modular framework around launching the (colo and interconnection) product in new markets.”
Sharp says that Digital Realty’s expansion of its business model tracks the evolving needs of its customers.
“A lot of customers have a hard time sizing what they need now, and particularly what they will need in the future,” said Sharp. “These footprints are starting to balloon in size, so there are a lot of colo customers that are growing and need more scale. But there’s a global component as well. A lot of our wholesale customers looking to use the colo product to stand up points of presence in new markets. There’s been a lot of cross-pollenization of the customer bases of the two products.”
Sharper Focus on Cloud Connectivity
Digital Realty is pushing further into the interconnection space with its Service Exchange offering, provides a network fabric that allows customers to privately connect with popular clouds and services, including both Infrastructure as a Service IaaS clouds like Amazon Web Services, as well as SaaS offerings like Office365.
Sharp, who knows the colo and interconnection market from a six-year stint at Equinix, says Service Exchange brings important new capabilities to Digital Realty.
“We see it as a major strategic advantage,” said Sharp. “There was a need to simplify the interconnection space. There’s a lot of lessons learned there. There’s been individual spot solutions, but no one that captured the required end state.CTO Chris Sharp: Service Exchange has changed the dialogue and perspective of how people view Digital Realty.Click To Tweet
“It’s created a very unique profile for us in the market,” said Sharp. “It’s changed the dialogue and perspective of how people view Digital Realty. Some of our early customers are becoming advocates.”
With many data center assets on the market, and a number of private equity-backed companies reportedly open to offers, the industry consolidation has a way to go. There’s historically two types of transactions: deals that expand your geographic reach, and those that add new strategic capabilities.
“M&A is a core component for Digital Realty,” said Sharp. “We evaluate every deal to see how it might fit in our portfolio.
“There’s a massive consolidation happening, which impacts what’s available,” he added. “With the strong demand and growth, we want to make sure we can stay with the market, and support our existing and new customers.”