Hyperscale Internet companies stepped up their investment in Internet infrastructure in the first quarter of 2018, setting records and raising a big question for the data center industry: What does the “new normal” look like?
The growth of cloud computing has created strong demand for data center space. Since the arrival of huge hyperscale deals for wholesale data center space in early 2016, analysts have been watching for indicators whether this was a temporary phenomenon. There are signs that this trend is picking up steam, and some savvy cloud watchers say the data center building boom may just be getting started.
Hyperscale Internet companies, including the major cloud computing platforms, invested $27 billion in capital expenditures (CapEx) in the first quarter of 2018, according to data from Synergy Research Group, which tracks cloud spending. That’s a new quarterly record, and positions the industry to easily exceed the $74 billion in hyperscale spending in 2017.
“2017 was a standout year for hyperscale capex, but 2018 has started out with some staggering numbers,” said John Dinsdale, a Chief Analyst and Research Director at Synergy. “Our quarterly market tracking has consistently shown strong growth in cloud services, but even so, these CapEx numbers took us by surprise.”
Keeping Pace With the Cloud
This isn’t the first time the industry has been surprised by cloud growth as we noted last year (Keeping Pace With the Cloud: Lessons from Google and Microsoft), along with the challenges of anticipating future demand (The Unimaginable Future: Data Center Leaders Grappling With Growth). In addition, these cloud providers have only recently begun sharing financial details of their cloud revenue, making projections difficult.
That’s why industry watchers focus on CapEx spending by the major cloud builders.
“Unlike marketing, CapEx doesn’t lie,” wrote Charles Fitzgerald, Managing Director of the cloud consultancy Platformononics. “CapEx spending on cloud infrastructure is both a leading indicator of the ability to compete at hyper-scale and also confirmation of success with customers. In cloud computing, CapEx is the ultimate form of putting your money where your mouth is, because no amount of jawboning alone will conjure up data centers or pack them with millions of servers.”
Fitzgerald estimates that in 2017, Amazon spent $19.7 billion, Google $13.2 billion, and Microsoft $11.4 billion on CAPEX (including capital leases for both Amazon and Microsoft). This represents year-over-year increases of 58 percent, 29 percent, and 12 percent respectively. Collectively, the three companies have spent over $195 billion on CAPEX in the last 17 years.
“The tech industry has never seen this level of investment,” notes Bernard Golden, VP of Cloud Strategy for Capital One. “This investment is indicative of the fact that our economy, our society, is shifting from atoms to bits.”
Building Enormous Global Platforms
The adoption of cloud computing represents a major shift in how technology is delivered, as companies shift their IT infrastructure from on-premises facilities to purpose-built data centers operated by cloud platforms and service providers. At the same time, new technologies are laying the groundwork for edge computing, which will require data center capacity in many new places.
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The migration of enterprise IT workloads into third-party data centers isn’t a new trend. But as we noted in our 2018 predictions (8 Trends That Will Shape the Data Center in 2018), the cloud and colocation industries have reached a level of maturity that offers compelling value, breaking down the historic resistance to moving data offsite. “This shift has been predicted with the arrival of a succession of hosting offerings, and has always seemed to linger on the horizon,” we wrote. “But make no mistake: Enterprises are getting religion about moving workloads off-premises. The trend accelerated in 2017, and will continue in earnest in 2018, creating sustained business for IT infrastructure providers.”
That business showed up in the first quarter numbers.
“This investment pattern reflects the realities of the cloud computing market: it’s a platform-based industry with enormous network effects that requires sufficient capacity to support exploding, spiky demand, much of which can emanate from geographies that require local infrastructure,” Golden wrote in a blog post. “That’s a recipe for needing to plow huge amounts of money into the business.”
Building Boom Attracts New Developers, Investors
The expansions by Google, Microsoft, Facebook, Oracle and Salesforce have been good news for data center developers, particularly those focusing on delivering “wholesale” data halls and built-to-suit projects. This group includes the publicly-held real estate investment trusts (REITs) like CyrusOne, Digital Realty, QTS and CoreSite, as well as private players like CloudHQ and EdgeConneX.
In early 2016 we begin to see the super-sizing of data center leases, with deals growing as large as 35 megawatts. Cloud providers also outlined tight timelines for the delivery of new capacity. These trends have driven a number of trends over the past two years.
- The focus on speed to market has boosted the fortunes of several providers who have demonstrated the ability to execute quickly, including CyrusOne and EdgeConneX. Other data center builders are adapting their data center designs and construction processes to accelerate their delivery timelines.
- Tighter delivery schedules have placed pressure on the supply chain for data centers, testing the ability of equipment manufacturers to deliver equipment for new facilities.
- Data center providers have begun building much larger data halls, spanning between 35,000 and 85,000 square feet and supporting as much as 9 megawatts of critical power.
- Developers are working closely with prospective tenants on sophisticated deal terms that can accelerate their expansion while structuring capital deployments over time.
A growing number of providers have refocused their business models to pursue larger deals, including Equinix, QTS Data Centers, Stream Data Centers and most recently Flexential, which announced that it was launching a wholesale product.
The booming hyperscale market has also attracted new players and fresh capital. CloudHQ, EdgeCore, and Chirisa Tech Centers are among the new faces pursuing opportunities in large-footprint data centers.
‘A Game of Scale’
A number of analysts see the data center market splitting into segments, with some providers focusing on hyperscale dealers, others targeting the edge, and still others developing managed services (especially security offerings) that can differentiate their businesses.
The cloud capital investment boom has implications for cloud providers, and the companies building capacity for them.
“We have long said that this is a game of scale in which most service providers cannot hope to compete,” Synergy’s Dinsdale said of the surge in 1Q 20-18. “Here is some of the clearest evidence yet.”
Fitzgerald noted that as Amazon, Google and Microsoft push ahead, it is becoming harder for cloud aspirants like Oracle and IBM to keep up. “Amazon, Google, and Microsoft each spent more on CAPEX in 2017 than Oracle has in its entire history,” Fitzgerald wrote.
The Digital Shift Requires Lots of Bits
Golden notes that the cloud investment boom is driven by a larger shift to a technology-driven society.
“The tech industry has never seen this level of investment,” Golden writes. “The investment we’re seeing in cloud capacity really has no precedent, save perhaps Henry Ford’s manic factory building for his Model T, the US government’s armaments efforts in WWII, and Foxconn’s manufacturing support for smartphones. As Ford’s efforts presaged the boom growth of the industrial economy, so too do (cloud) investments augur the explosion of the digital economy.”
In a big-picture outlook last year, James Hamilton of Amazon Web Services predicted that cloud providers may eventually need hundreds of regions to support their global customers.
“Each region will require at least three data centers and the largest will run tens of independent facilities,” said Hamilton. “We will all work hard to eliminate every penny of unneeded infrastructure investment, but there will be no escaping the massive data center counts outlined here nor the billions these deployments will cost. There is no short cut and the only way to achieve excellent world-wide cloud services is to deploy at massive scale.”
Mark Thiele, a veteran cloud executive and CIO at Apcera, predicts that the IT market will nearly double by 2022 and we could see even bigger growth of the cloud data center footprint.
“As the costs continue to go down and the capabilities continue to improve, humans will continue to find new ways to put IT to use that never would have been considered just a year earlier,” notes Thiele, who uses LinkedIn to convene trend discussions among thought leaders.
“My only concern about the estimates I’ve provided here is that they are conservative from a growth perspective,” Thiele added. “Tighten your hats and put your local CSP and colocation provider on speed dial because the next five years are going to make the last five pale in comparison.”