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Leasing data center space: How it may affect cloud service delivery

Rather than spend millions building out their own facilities, more cloud providers and MSPs are choosing to lease data center space. But how will that affect service delivery?

Building a data center is costly and time-consuming for cloud providers and managed service providers (MSPs). Depending on the location, the cost to purchase land and construct a facility in the U.S. can be as high as $1,500 per square foot. The project timeline can easily run five years, from the decision to build the facility until services are rolled out.

So it's not a surprise that more service providers are choosing to lease rather than build data center space to run their cloud services.  

Globally, data center space is growing through new construction and the expansion of existing space. In the relatively mature U.S. market, Frost & Sullivan forecasts that total data center space -- which includes everything from the server closet in a small business to mega data centers built by Google and other industry giants -- will increase by nearly 10% through 2015.

Service providers currently own about 57% of the data center space they use to deliver hosting and cloud services; by 2015, that number will drop to 49%.

But even as total data center space increases, the percentage built and owned by service providers will decline. Cloud providers and MSPs are increasingly leasing some or all of the capacity they need from colocation providers or real estate developers. The colocation provider leases space (which it may own or lease from yet another provider) to tenants by the room, cage or rack. Real estate developers are generally responsible only for the "shell" of the facility, leasing large expanses of unimproved space to tenants. In both cases, service providers configure the space and deploy infrastructure equipment to support the services they offer.

Service providers currently own about 57% of the data center space they use to deliver hosting and cloud services; by 2015, that number will drop to 49%. The remaining space is leased out by third-party providers -- predominantly real estate developers, whose share of the market will grow from 38% to 51% in the next four years.

Just as enterprises are drawn to cloud services' low barrier to entry, service providers value the ability to launch a cloud service with minimal cost and time investment by leasing data center space. In fact, many MSPs are able to introduce Infrastructure as a Service (IaaS) to their customers simply by repackaging another provider's services. The utility pricing, scalability and lack of term and volume commitments enable MSPs to align costs with revenues, turning the launch of cloud services into a low-risk venture.

But while leasing presents the opportunity for considerable savings, cloud providers and MSPs must consider how leasing may affect cloud service delivery. Additionally, providers must be mindful of the growing role power consumption will play in leasing agreements.

Ensuring uniform service delivery across data centers

For many providers of cloud and hosted services, data center space and facilities contribute to the value proposition of the services. Most service providers tout their data center expertise by publishing counts of their data centers and/or total square footage. In doing so, they usually don't state which of their locations are owned versus leased; they fear that revealing this information could raise doubts among customers that their service is delivered uniformly.

Uniform cloud service delivery is indeed a real challenge to service providers, especially when facilities are leased. Providers must take disparate physical locations -- with different owners and different distances from power stations and network facilities -- and configure them to "look and act" the same to customers, with uniform specifications and service-level agreements for redundancy, security, availability and performance. At the same time, providers need to manage their internal costs. Service providers often charge a uniform rate for cloud or hosting services, even though customers occupy space in data centers that vary in cost to the provider.

To meet return on investment (ROI) goals, cloud providers and MSPs must pay continual attention to lowering expenses in higher-cost facilities. They should also consider aggregate costs across all of their data center facilities rather than attempt to achieve profitability at each location.

Additionally, cloud providers should establish a checklist of specifications that will guide their selection of all leased space. The list should include location-specific elements like proximity to redundant power grids and fiber networks, as well as builder-provided elements like redundant power and cooling distribution systems and fire suppression systems.

Cloud providers should also use common configurations for the systems supporting their services; for example, they should install load balancing, networking and security appliances that will deliver similar performance across different locations.

High-capacity servers drive data center space needs

Meanwhile, another factor should influence service providers' data center space requirements.

More on cloud data centers

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The art of cloud balancing: Interconnect data centers to create one cloud

Securing the data center: How to overcome the lack of cloud standards

High-capacity servers are making data centers denser, as they support greater computing and storage capacity in the same square footage. As a result, power -- not space -- is becoming the bigger spec to evaluate for data center space. In many cases, colocation and real estate developers have changed their contract terms so that megawatts of power utilization, rather than square feet of space, form the primary leasing unit. 

This shift should benefit cloud providers because it allows them to align expenses with revenue. Service providers should negotiate a lease based on power consumption or a combination of data center space and power. 

The increase in server density will slightly dampen the rate of growth in data center construction over the next few years. Cloud providers, colocation providers and real estate developers will defer investment in new construction for as long as possible, handling growth in demand by milking all they can from their existing spaces.

As the nascent cloud services market reaches maturity, service providers will need a flexible, on-demand source of computing resources to handle customer needs. Ironically, they will behave like their own customers -- rejecting the capital- and time-intensive do-it-yourself approach to building data centers in favor of leasing space from a third-party provider.

About the author: Lynda Stadtmueller is program director of cloud computing research and analysis at Stratecast, a division of Frost & Sullivan.

This was last published in March 2012

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