How Hyperscale Investments Are Behind Mega Growth Of Europe’s Data Centre Market
[Also published in Data Economy: 27/02/19]
The commercial data centre market is expanding at an unprecedented speed across Europe, not just in high profile, new growth regions like Scandinavia and Ireland, but also in traditional markets like the UK, Germany and the Netherlands where capacity is increasing faster than ever. Analysts at CBRE report that the commercial European “FLAP” market has doubled in size in four years (average annual take up between 2016 and 2018 was 150MW, compared to 63MW in 2015) and that a third of colocation capacity in the four biggest European markets has come online since 2015. In the UK, where we might have expected to see a dent in growth since June 2016, the story is the same – Brexit so far seems to be having a very muted effect, if any, on supply, and occupancy is also healthy.
It’s worth having a closer look both at the figures and what might be driving them. And you don’t have to look far: whoever you ask, the answer is “cloud”. Gartner reports that between 70% and 90% of all organisations are now using cloud, that the 18% CAGR primarily comes from migration and new applications, and that the market is consolidating around the large US providers with the top four hyperscale operators holding nearly 47% of the global market.
Commercial data centre capacity is closely monitored in Europe both at nation state and regional level by market analysts. Enterprise capacity, however does not tend to be picked up in the same detail, unless a transaction is involved – so we might hear anecdotally that enterprise sites are entering the market and being repurposed as colocation capacity or that a large enterprise operator is acquiring a site, but we don’t have comprehensive data or even a reliable barometer for the proportion of enterprise activity that is still on-premises. What we do have is Gartner, who predict that 80% of enterprises will shut down on-premise data centres by 2025 in favour of outsourcing to third party providers. Many will also take this opportunity to consolidate their estate and reduce energy consumption and other operating costs. This isn’t limited to business – Government has been delivering applications through G-Cloud and migrating its legacy estate into Crown Hosting colocation since 2015. When you add in the growth of new business and government applications being implemented via various outsourced cloud models, this has to be good news for commercial providers.
The obvious result is growth in colocation provision (which we measure) accompanied by some degree of diminution in on-premises activity (which we don’t). However, what is really interesting is the form that this growth is taking and how it is impacting operators, market development and business strategies.
The first thing to note is that this growth in demand is not being driven by an explosion in the number of transactions as enterprise companies individually migrate their IT estate or outsource new offerings to cloud. In fact, the opposite is true: transaction numbers have shrunk but the individual deals have mushroomed – in Q1-3 2018, the ten largest individual transactions collectively exceeded 65MW; as recently as 2015 it took over 150 transactions to reach the (then) annual total of 63MW. CBRE attributes this to “enterprise companies migrating significant amounts of their IT footprint to the cloud and these smaller individual requirements being wrapped up together as one large cloud requirement” (ibid).
So, who is doing all the buying?
At the moment this big bulge in demand is coming directly – and indirectly - from the hyperscale operators. Up in Scandinavia where renewable energy is cheap and there is plenty of available land, the tendency is to establish a campus and self-build. A similar pattern is evident in Ireland. We haven’t expected overwhelming interest in the UK market from these players because hyperscale operators are less likely to need London connectivity levels and UK energy costs are unattractively high. Plus, we just don’t have the real estate: anyone looking for 200 acres of cheap land near the M25 will be disappointed - large sites with position, power and ping within starship range of the London market are long gone. So, we don’t really factor in the hyperscale cloud operators when we talk about our data centre infrastructure here.
However, it is a mistake to assume that these operators are uninterested in the UK or the other mature metro markets. Like all major players, they are strongly focused on developing and expanding their strategic assets. And the UK is still the largest market in Europe. “Hyperscale operators are seeking to expand their presence in the UK but they are not developing their own campuses, they are taking space in existing commercial facilities – and lots of it” Vijay Mistry – Partner, VIPA Digital .
This has some interesting implications for operators. The most obvious thing is that large US cloud companies operate at an entirely different scale to traditional clients: for a wholesale provider a hyperscale contract might easily be 20MW. While a contract of this size is an extremely attractive proposition, it comes with a number of caveats: first there is a very strong downward pressure on pricing, and we are seeing significantly lower prices on the table in some parts of the market than three or four years ago. Secondly, they challenge the existing way that operators build. A hyperscale operator is a very well informed, very sophisticated client who will expect a highly engineered design but will have a different, more strategic approach to certain key elements.
Take resilience, for instance, where they are reducing dependence on physical infrastructure, on 2n or N+1 redundancy of power, connectivity and other M&E. Resilience is increasingly to be found in the IT architecture and software. Tier levels are coming down – but that doesn’t mean that risk is increasing.
Hyperscale operators are also very strategic about the way they leverage their infrastructure to balance business priorities. Rather than operate an identikit fleet with standardised characteristics like resilience and latency, they may consolidate sensitive business (such as payments or other transactions) in one or two high tier facilities and apply lower levels of redundancy to sites dedicated to activities like browsing, searching and batch-processing. Anecdotal reports suggest that in at least one case this has dramatically improved operational energy efficiency.
So, the hyperscale entry into the European markets over the last three years or so is definitely having a disruptive effect: escalating growth rates to new levels, changing business and operating models and influencing the character of even the mature markets. For traditionally built data centres it will be hard to retain margins on hyperscale uptake, and the trend towards fewer, larger customers can leave operators more vulnerable if one decides to relocate, chooses to release capacity they no longer need or exits the market. The most interesting development, though, is the tendency among the larger colocation providers to develop complete data centre ecosystems where they can supply the entire spectrum of market demand – from a single rack to wholescale, from hyperscale to cloud. This is something we haven’t seen before, and we will be watching this space very carefully indeed.
 The FLAP market comprises the four largest clusters: Frankfurt, London, Amsterdam and Paris
 CBRE, European Data Centre Trends, January 2019.
 Gartner, Outlook, European Cloud Market 2019, delivered at Kickstart Europe, 15/01/2019
 Gartner, From Hyperscale to the Edge: 2019 tech trends, from Kickstart Europe 2019 Outlook, 15/01/2019
 CBRE, European Data Centre Trends, January 2019