I recently read a piece from Nick Razey the CEO of Next Gen Data Centers over at Data Center Dynamics where he laid out a compelling case for what a commodity is and how is doesn’t apply to data centers. I think it does.
Nick’s premise is that the definition of a commodity is same product, same quality of said same product, and same price for same quality product. The nuance and chief differentiator is a spot market. In other words a commodity is the same thing for the same price and a spot market is the key differentiator. Except data centers. They’re not a commodity.
Well, why not?
He points out that there are different Tier levels, different densities, different connectivity options, different staff training levels, and different procedures and this makes data centers commodity proof because the quality varies so much. Since there is such a variance in quality it’s buyer beware and data centers are therefore not a commodity. Really?
The reason for Tier Levels, SSAE 16, FISMA, TIA/ANSI, and a whole host of other standards is to insure that all of the quality issues ARE mitigated and sameness of quality and operation are adhered to. In other words – we have the definition of sameness, AND the yardstick to measure it. What are operators afraid of? Is it something else besides standards? Nick makes the case that no one with any smarts goes for the cheapest data center option but if gasoline/petrol prices were cut in half, we would all jump to the new gas. Why? With how different the refineries are in their age, location, safety standards, and additives it makes little sense why the gasoline/petrol business is a commodity at all if we use the same logic and argument. I call ‘bullshit’.
Another issue he points out is that capacity provisioning capacity makes it almost impossible to offer a spot market. Capacity cannot be scaled up or scaled down to meet demand. Really? How do we manage this crazy world of scale? Design and planning are vital steps to any project because they eliminate big problems and let you run ‘what if’ scenarios. Scaling up or down is a non issue, in fact, in a recent study we did we found that operators are really good at managing vacancies around 28% to allow for said scale. And licensed power vs. used power is where you see the issues.
The next point is that operators seek long term contracts to guarantee return on investment. Not sure why that’s an issue. Any due diligence I have ever gone through includes a look at finances to insure that every deal they do is profitable, it’s not a good sign if an operator did 50 deals last quarter and by some measures is knocking it out of the park – when in reality all of them lost money. A good operator will ALWAYS mitigate risk. Customers buy risk – physical, financial, operational. Period. Don’t think so? Then why is there mire than one Tier level for data centers?
Nick makes a couple of excellent points about the barriers of entry being high and how new entrants have not changed the paradigms. I would agree that the barriers of a successful entry are high and I will make the point, based on personal experience, that the investors are the highest barrier, and as a result, are reluctant to change paradigms in spite of proof on how to do exactly that. It all comes back to risk, and the fact that there is more money than data center operators out there. I could write a whole other blog post about kissing frogs looking for money (but I won’t). Nick also makes the point that to buy in and get a seat at the table costs well over $10M and I will disagree with this statement entirely. Some of it’s the money/investment component and the other is there are cheaper ways to skin the cat. The model we did had a facility built for under $5M (per MW).
The next piece of the post nailed it – that cloud services were more like commodities than anything. I agree. He goes on to say that cloud services may be the next commodity, which I started to agree with until I zoomed back out and realized that you can’t have cloud without a data center and because of that and by association cloud will never be a commodity because the raw materials (data centers) cannot be commodities so the whole premise is flawed.
The net of it all is this – If you have $40M you can absolutely commoditize this business in under a year. We proved it. And Nick just helped prove it in a roundabout way as well.
We should disclose that Nick or Next Gen data centers are not Blunt Hammer clients or prospective clients, and that our findings and models are proprietary and real. Blunt Hammer is talking with two groups who are intrigued with what we’ve done and we’ll see if there isn’t an entrant with the right investor that finally does break in and break the business. Who wants to buy some risk?
mark AT blunthammer.com