Software is eating the world, and it has set the table for another powerful trend – the cloud is chomping away on the enterprise data center.
The shift of enterprise IT workloads from on-premises IT facilities into third-party data centers is a long-term trend that has been gaining momentum. This migration has gained pace during the COVID-19 pandemic, which prompted many companies to turn to cloud services to support a distributed workforce.
It will be further accelerated by new offerings that bring cloud hardware and software into telecom networks and customer data centers, including on-premises facilities, according to new projections from Gartner, which are reinforced by executive commentary from large data center operators.
“The shift to the cloud has only accelerated over the past two years due to COVID-19, as organizations responded to a new business and social dynamic,” said Michael Warrilow, research vice president at Gartner. “Technology and service providers that fail to adapt to the pace of cloud shift face increasing risk of becoming obsolete or, at best, being relegated to low-growth markets.”
This quickening cloud shift has significant implications for the data center sector:
- Growing demand for cloud platforms translates into more business for developers of wholesale data center space, including turn-key data halls, powered shells and build-to-suit projects. Securities analysts tracking the sector expect hyperscale operators to rely more heavily on wholesale leasing as their network expansions gain pace.
- As cloud technologies extend into the enterprise, the “cloudification” of the colocation industry will allow data center service providers to play a growing role in the hybrid cloud architectures being embraced by enterprise customers.
- The cloud shift is also good news on the sustainability front, as more IT workloads move from on-premises data centers to highly-optimized facilities run by cloud platforms, which are more energy efficient and far more likely to be supported by renewable energy.
Bringing Cloud into Non-Cloud Legacy Environments
Gartner said distributed cloud will further blur the lines between traditional IT and cloud offerings. Amazon Web Services, Google and Microsoft have all introduced edge cloud services featuring pre-loaded racks and servers that server as extended end points for their cloud platforms.
“Enterprise adoption of distributed cloud has the potential to further accelerate cloud shift because it brings public cloud services into domains that have primarily been non-cloud, expanding the addressable market,” Gartner said in a press release. “Organizations are evaluating it because of its ability to meet location-specific requirements, such as data sovereignty, low-latency and network bandwidth.”
In recent earnings calls, the CEOs of the largest data center providers affirmed that the growing maturity of cloud services is reshaping the architecture of enterprise IT.
“Cloud computing has permanently reshaped customer expectations for speed and simplicity,” said Charles Meyers, the CEO of Equinix. “Customers want to deploy infrastructure where they want it and when they want it, seamlessly integrating cloud-based workloads and private infrastructure and enabling agility and performance between the two.”
Enterprise customers don’t just want more cloud, they want it in more places. Cloud and colocation providers have been key players in helping address data sovereignty challenges that require data to remain in-country.
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“We are witnessing a growing trend of multinational companies across all segments, deploying and connecting large, private data infrastructure footprints on PlatformDIGITAL across multiple regions and metros globally,” said Bill Stein, the CEO of Digital Realty.
Cloud Outpacing Traditional IT in Key Segments
In 2022, more than $1.3 trillion in enterprise IT spending is at stake from the shift to cloud, growing to almost $1.8 trillion in 2025, according to Gartner.
Gartner predicts that enterprise IT spending on public cloud computing will overtake spending on traditional IT in 2025 in key markets, including the application software, infrastructure software, business process services and system infrastructure markets. By 2025, 51% of IT spending in these four categories will have shifted from traditional solutions to the public cloud, compared to 41% in 2022.
“Demand for integration capabilities, agile work processes and composable architecture will drive continued shift to the cloud, as long-term digital transformation and modernization initiatives are brought forward to 2022,” Gartner notes. “Technology product managers should use the cloud shift as measure of market opportunity.”
The Data Center Angle
Edge devices at enterprise premises could allow some companies to” dial direct” to cloud platforms, reducing their reliance on cloud on-ramps at colocation facilities. But cloud has been cited as an example of Jevons’ Paradox, in which lower costs lead to higher usage and new use cases that were impractical in prior settings.
That’s why cloud adoption has not been a zero-sum game, but has boosted business for both service providers and cloud platforms. As noted in the recent DCF report on hybrid IT, “enterprises today are mixing and matching data center, cloud, and colocation to balance their needs for stable production, rapid prototyping and development, security, and customized high-performance compute to meet increasing workload requirements.”
Colocation providers have been adopting “cloudification” strategies to position their data centers as key links in this new hybrid, multi-site IT architecture. The largest colo providers – including Equinix, Digital Realty, Cyxtera and Evoque Data Center Solutions – all rolled out new strategies to cloudify their offerings, embracing online ordering, software-defined networking (SDN), application programming interfaces (APIs), orchestration tools and DevOps expertise.
The cloud shift also means that the strong growth in hyperscale demand for data center space will continue. The acceleration in enterprise adoption contains benefits for wholesale developers, as hyperscalers will keep pace by leasing space instead of building data centers themselves, according to Sami Badri, a senior analyst at Credit Suisse.
“Based on our discussions with industry professionals and MTDC (multi-tenant data center) construction data points, we expect the percent of outsourcing to be above 60% in 2022E-23E versus the sub-50% mix we have seen in the 2020-21 timeframe, largely driven by greater geographic capacity needs, time sensitivity, and an overall supply constrained environment,” Badri wrote in a recent update.
Equinix CEO Meyers says that the maturity of cloud and colo offerings is enabling more companies to use cloud, and raising the IT game across the board.
“Businesses globally continue to prioritize digital transformation,” said Meyers. “The secular drivers for our business have never been stronger, as digital leaders demand infrastructure that is more distributed, more ecosystem powered, more flexible, more sustainable and more interconnected than ever before.
“This is a really strong movement towards digital transformation, and people are saying that is a critical source of competitive advantage,” Meyers added. “They’re making investments accordingly, and (updating) how they think about their infrastructure and their mix between cloud-based workloads and private infrastructure. We’re seeing just tremendous strength across the board.”