Daniel Golding, Vice President, Tier1 Research, a subsidiary of The 451 Group

Can you explain the main differences you've outlined in your research pertaining to dedicated, shared and managed services models?
There are even a couple more gradations than that, depending on where your interest is. On one hand, there's hosting, which falls into shared and dedicated, which is mostly conventional Web hosting. You've also got things like content delivery that come from networks like Akamai, which isn't Web hosting but something different. Then there's managed hosting, which is not Web hosting at all but a form of selective IT outsourcing for specific servers, databases, storage applications. Then you've got colocation of a wholesale data center. If you need additional data center resources outside your enterprise and you still want to run your own servers, storage and databases, it lets you lease other people's data center access.

What are the biggest trends you see in managed hosting and colocation?

The most obvious thing is that managed hosting and colocation are still growing very rapidly even though we're in a recession. Managed hosting is growing more modestly than before the recession. Back then it was growing in excess of 30 percent year over year; right now it's single digits. But colocation is still growing, certainly in double digits this year, and larger providers might be growing even faster.

Why are the services growing faster than the customers themselves?
A lot of it is based on the fact that enterprises don't have the capital to build their own data centers; that was also the case before and during the recession. Today, we've got a generation of people in IT who grew up with the Internet or online services and they are used to the idea that you don't need everything locked up in your data center. It's okay to use things on the Internet and it's okay to use hosting services. That's a sea change from the mainframe and client/server days when everything was locked up. It will continue to spread because those 20 and 30-somethings aren't in the CIO office yet.

Why has colocation remained so hot?
It's the old business model of taking something that people do inefficiently and doing it efficiently for many people. The fact is, no enterprise can efficiently build and operate a 5,000 or 10,000 square foot data center. It is not financially possible due to the laws of thermodynamics. You can only operate a data center well when it's at scale, and that gives the colocation industry a tremendous head start to get at all the things you don't need to keep inside the business. The other issue fueling growth is that colocation has only single digit penetration and market share. Even at the fast rate they are growing there is still a huge amount of territory to cover and it will take many years to get even 50 percent penetration, that's a decade away.

But some IT-centric and very large businesses are still operating data centers and host their own IT and Web assets.
Yes, but these facilities are very, very expensive to build and the only way to really make money is at a scale of 100,000 if not 300,000 square feet. It costs about $1,300 per square foot to build one of these so if you're talking about 100,000 square feet, that's $130 million. That's not chump change, especially when it's even difficult to get a secured mortgage. It's a tricky deal for these guys to finance their builds and expansions.

So the debt markets are holding this back?
Very much so. You watch TV and hear about a credit crunch but it's not just affecting homebuyers. This is a great example of a market really being pressured - data center providers are great credit risks and not terribly indebted. But they can't get funds or even mortgage loans that are secured by data centers with real customers in them.

Will the credit crunch drive up costs for customers?
Yes. Right now cost is being kept artificially low because providers don't want to upset their customers in the middle of a recession. But as the recession begins to ease, and we're seeing a few signs of that, I think toward the end of the year we will see some price increases.

Do you think software, database and even businesspeople need to learn more about hosted data centers?
One of the things I wish is that the software guys would become more familiar with this topic. A lot of people, not just the software guys, pretend that the world ends at the wall jack. In fact, all of this stuff ties together and if you're going to be a good application developer you need to understand how everything works together. A lot of enterprise architects have never been in a data center. They draw a lot of diagrams and squiggles and circles, but unless you know the software, the network, the security down to the data center level, I don't see how you can really be an enterprise architect. You have to know all the pieces. 

This story originally ran in Information Management Focus on Data Centers. To view the digital edition, click here.

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