Data Center Giants Report Strong Growth, ‘Competitive Intensity’ In U.S.

Big data center providers continue to grow at a steady clip as more capital and resources flow into the fast-changing sector.  

Equinix and Digital Realty, two of the largest data center firms in the world, each reported their fourth-quarter results last week, showing consistent revenue growth despite the impact of the coronavirus pandemic on development timelines and countless enterprises across the world.

“We believe we are well-positioned to continue to deliver sustainable growth ... whatever the macro environment may have in store,” Digital Realty CEO Bill Stein said on a Thursday call with shareholders. 

Digital Realty reported $1B in revenue and $130M in bookings from October through December 2020, including $21M in smaller deals of 1 megawatt or less and $12M in interconnection services, which offer boosted connectivity to its customers. Digital Realty executives also acknowledged the rapidly changing competitive environment for data centers, with hyperscalers — major tech companies that offer both cloud services and infrastructure, requiring vast amounts of data center real estate — driving an outsized share of the market growth. 

Microsoft, Amazon and Google now account for more than half of the world’s 597 hyperscale campuses, according to a recent report from Synergy Research Group, which tracks data center development. Those tech giants aren’t taking their foot off the gas in building out their own massive data center facilities. Microsoft announced last week a major data center site and accompanying tech campus spanning Fulton and Douglas counties in the Atlanta area.

To supplement that power, hyperscalers lease space from wholesale colocation providers, such as Digital Realty and Equinix, with the capacity to support their needs. That relationship, so far, has been a major boon: A June 2020 report from Synergy showed that hyperscale operators were the fastest-growing customer category for colocation providers, with revenues in that category outpacing other revenue streams at this time last year. 

“Hyperscale operators continue to grow their revenues at double-digit rates and to maintain capex spend at $30B per quarter, the majority of which is targeted at their data center infrastructure,” Synergy chief analyst John Dinsdale said in a statement. “As part of that they rely on colocation providers to lease out both large wholesale facilities and capacity at smaller edge locations. Hyperscale operators continue to become an ever-more important source of business for leading colocation companies such as Equinix, Digital Realty, NTT, CyrusOne, QTS and GDS. This market has remained mostly unaffected by COVID-19.”

Equinix, likewise, noted hyperscale demand as a driver of bookings last quarter. Its total revenue was $1.6B, up 10% over the prior year. CEO Charles Meyers noted rapidly evolving market dynamics, particularly in the U.S., which remains by far the world’s largest and most competitive data center market. 

“We think that the competitive intensity of ... the hyperscale business in the U.S. is significant,” Meyers said. “Supply and demand are coming more into line in the U.S. markets, whereas I think they were a little out of balance for a while.”

The breakneck growth of hyperscalers has “been our friend,” Digital Realty Chief Financial Officer Andy Power said on Thursday. 

“If you look to our development pipeline ... you have to imagine there’s a lot of hyperscale business there,” he said, noting that a majority of Digital Realty’s new developments are pre-leased.  

The dominance of customers like Microsoft, Amazon and others in the market appears to have upped the ante for providers who must offer a differentiated product, not just space in a facility, in order to compete in increasingly crowded markets such as Northern Virginia, the densest data center region in the world. 

Cheap, plentiful capital has flooded the data center market in recent quarters as other assets, such as retail and office real estate, have slumped due to the pandemic. That sparked a feeding frenzy of data center deals, which totaled at least $30B last year.

Data center mergers and acquisitions have grown more competitive in the past year as capital poured into the market, Digital Realty executives said. Along with other data center providers, Digital Realty aims to shed older facilities and replace them with more modern sites as part of a regular capital recycling program.  

Equinix, Digital Realty and other colocation providers are seeking deeper inroads into Europe, Asia and other parts of the world that present potential growth opportunities as the U.S. market matures. Coresite, another large provider with most of its business in the U.S., reported Q4 revenues of $606M, representing growth of 6%, and noted evolving supply-and-demand dynamics in foreign markets on a recent call with investors.