Has Data Center Consolidation Peaked?

Has Data Center Consolidation Peaked?

While many in the IT and facilities segments have been discussing the consolidation of data centers to take advantage of dramatic increases in density, virtualization, new cooling technologies, and cost savings, there’s another kind of data center consolidation that’s just as dramatic.

Mergers and Acquisitions of Colocation and Wholesale Data Center Providers

From the current trends we’re observing, there are at least another one to three years of active consolidation coming in the colocation and wholesale sides of the data center business. Here's why.

Local colocation providers frequently lose out on deals because they only have one location...basically, the BDR disqualifier (backup and disaster recovery) -- definitely worth clarifying because among data center sales and marketing professionals there’s a job title acronym with the exact same name (BDR for business development representative).

Marriage Motivations and the Lower Margin Price Shopping Clients

While this consolidation could also be driven by deals lost over latency/edge issues, the smaller the colocation provider, the more basic the bread and butter clients that they service (transportation, media, tech startups, professional services, etc.)

These colocation providers can lease wholesale space in other parts of the country, but that approach rarely satisfies the most sophisticated IT buyers, with the bigger budgets and that need the highest margin add-on managed services. So these colo's settle for mediocre, low-margin clients that price-shop.

Sales and Marketing Shortcomings Amount Local and Small Regional Data Center Operators

These same local colo providers also frequently don't have anywhere near the capital to build the sales and marketing resources needed to compete with the larger regional and national colocation providers.

In other words, if the local or regional colo provider doesn't have $10M to $20M to build a facility, it likely doesn't have a few hundred thousand dollars to up its game in demand generation or positioning either.

So these companies limp along, try to stay cash flow positive, and hope for an exit.

The Managed Service Provider (MSP) Band-Aid That Buys Small Colo Providers Some Time

Many also historically have depended on partnering with local managed service providers (MSPs) for new business generation -- but MSPs aren't exactly in the healthiest shape business model wise either.

And many local colo's blur the lines between colo and MSP to levels that make MSP owners uncomfortable over account control issues.  And even working with commission-only data center/telecom brokers has its pros/cons (many small colo's can't qualify either).

So the regional colo providers will continue to acquire the local colo providers.

And the national/international colo/wholesale providers will continue to acquire the regional colo providers for largely the same reasons: capital and scale.

The Bottom Line

Whether it's private equity buyouts, rollups, or more traditional mergers/acquisitions, data center consolidation of entire companies -- or at least portfolios of facilities -- will definitely be continuing for the foreseeable future. Are you for sale?

How do you feel about the consolidation of data center providers and the maturity of the industry? Share your take in the Comments below.

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