Data Centre landscape disruption
December 2022
INTRODUCTION
The pandemic fostered Cloud adoption and investments in data centres (DC). However, DC operators have been facing inflation and sustainability challenges in 2022. What can we expect for 2023?
This article presents a brief outlook of the data centre industry in terms of:
Demand
Sustainability
Operations
Landscape
Investments
Markets
DEMAND
Weak macroecomic conditions and increasing capacity cost are likely to temper the growth of the data centre market in the short term.
However, the strong demand for data centres will continue, driven by the following factors.
Current demand drivers
Exponential growth in data traffic (due to increase in internet users, home working, online services)
Emergence of Edge computing, which offers the lower latency required for autonomous vehicles, connected devices, and advanced robotic, underpinned by AI/ML, IoT and 5G
Growing acceptance of Cloud computing
Substantial investments in subsea cables and FTTP
Longer-term demand drivers
Crypto (suffering from scandals)
Web3 (facing regulation uncertainties)
Virtual/Augmented/Mixed Reality (yet to be widely accepted by consumers)
Quantum computing (presenting high costs)
Future submarine cables landing in Europe (source: Telegeography, corporate websites)
SUSTAINABILITY
Nowadays, the data centre industry faces stricter sustainability regulation and energy challenges.
Sustainability regulation…
Encouraging renewable energy
Setting Power Usage Effectiveness targets
Promoting new cooling technologies
Requesting water recycling
Controlling electricity consumption
Limiting carbon emissions
Restricting space
Energy challenges:
Data demand pushing energy consumption
Energy supply issues exacerbated by the war in Ukraine
Increase in power costs
Thus, DC operators must deploy solutions such as:
District heat reuse
Alternative fuels
Liquid cooling
Digital energy efficiency
Taller buildings
Circular infrastructure
OPERATIONS
Data centre companies must innovate and tackle operational challenges as costs rise and developments become more complex.
Operational challenges:
Rise in construction costs
Equipment delays due to supply chain issues
Shortage of experts
Cyber security threats
Data Protection Act and GDPR requirements
Brexit uncertainty
Technology innovations:
AI to analyse data and enhance datacenter operations
Software defined power infrastructure for monitoring and insights
Modular components and prefabricated facilities, which are cheaper, more predictable, and faster to implement
LANDSCAPE
The data centre landscape is evolving due to the following reasons:
Tech Giants opt for locations that present economic benefits for their hyperscale data centres.
They also lay their own subsea cables and data centres have been built near cable landing stations in order to provide interconnection services.
As Cloud players enter new markets, they bring in their preferred suppliers who reshape the local industry.
Some DC operators will pass on their higher costs to their customers by increasing their cloud and managed-service prices. As they do so, Cloud players may decide to own and operate their own facilities.
As the line between retail, wholesale, telco and interconnection is blurring, new business and ownership models will form.
New Cloud-native WAN providers compete with traditional data centre operators in the growing interconnection market.
Other players in the value chain may also dislodge the legacy colocation service providers.
The definition, offering and infrastructure of the ‘Edge’ are yet to be finalised ; thus new actors could seize dominance in this emerging ecosystem.
Largest data centre operators in Europe (source: Telegeography, corporate websites)
INVESTMENTS
Projects
32 DC projects totalling 600 MW are planned across Europe until 2025, according to TeleGeography.
In particular, investments in hyperscale data centres, which offer scalability, backups and power efficiency, are increasing.
For instance, the construction of the Sines 4.0 campus began in April 2022. It will be built by tranches, and it will become the largest European DC facility once fully completed in 2027. It will be cooled with sea-water and its nine buildings will have a combined capacity of 495 MW. It will benefit from the upcoming Medusa submarine cable system (connecting the East and West Mediterranean with the Atlantic sea), Olisipo (linking Sines to the Lisbon Metro Area), and the recent EllaLink (connecting South America to Portugal).
Sines 4.0 (Start up Campus) and Olisipo and EllaLink subsea cables (credit: Capacity Media)
Acquisitions
The 2022 worldwide data centre M&A value is set to equal this of 2021. In particular, data centre acquisitions continued across Europe in 2022.
Recent European data centre acquisitions
Further deals and consolidation are expected in 2023. However, in the uncertain financial context, riskier investments in small markets, edge and immersion cooling technologies may be put on hold.
Trends
Continued DC acquisitions
Further hyperscale DC investments
Investments in new metros
‘Edge’ investments
Consolidation of DC providers
Operators selling to funds
DC supply fuelled by PE investment
Further sales and leaseback transactions
Challenges
Ongoing increase in prices
Large valuations
Yields stabilising
Market volatility
Uncertain returns
CONCLUSION: MARKET OUTLOOK
The largest European DC markets have so far been Frankfurt, London, Amsterdam, Paris, and Dublin (FLAP-D) because of their substantial economy, population size, infrastructure and connectivity. However, they are now facing high costs and regulatory constraints. Thus, new cities are attracting large campuses, such as Barcelona, Madrid, Milan, Zurich, Berlin, and Warsaw. Investors should consider markets offering natural resources (e.g. Reykjavik), cheaper costs (e.g. Munich), incentives (e.g. Stockholm), subsea connectivity (e.g. Marseille), smart city initiatives (e.g. Oslo), Cloud services (e.g. Milan), and skilled staff (e.g. Budapest).