We have talked about the role of the CIO changing in recent years to being a source for applications. – The CIO is no longer overly concerned about operating IT, which after all belongs to IT - not CIOs (!) Then, along comes Cloud computing and the growth of the co-location industry, and two seperate but related points become more generally well- accepted. One, that IT load will increase, and that the increase will be proportionately borne more-so by the host provider model; and two, in order to bear that increased demand for IT load, the industry itself will grow leaps and bounds in order to capitalize.
But – how is this growth to be funded? It’s a bit of a dilemma because there’s a built-in contradiction. I was discussing this with my colleague, Bernie Cobb, who also has interests in this topic (read his blog here: Data Center Financing: Not for the faint of heart). The co-location model he discusses exists partially to accommodate CFOs and CIOs who are averse to funding new data center projects with capital that can be put to better core business uses. Yet, in order to be a service provider, be they existing or new, they have to build out the data center space in order to provide it to the market.
It’s the best example of Keynesian economics existing today within the IT industry.
Let’s, for a moment, look at the two models:
- Self-fund with available capital (sitting on it or borrowing it)
- Private equity, and private equity can circumnavigate the host company, see below
As a private equity investor with interest in this growth industry, there are, in turn, two models that private equity would operate under.
- Investing directly in the host provider company to fund the data center investment. For the host provider, equity financing is a dilution in ownership – or a reduction in the value of the business. So the host provider needs to determine the best path they need to take to acquire capital.
- Direct, private equity investment in a data center that the end customer then uses. This is a possible scenario for large project financing that supports building and owning data centers to suit specific customers. However, at this point the private equity really becomes a wholesale co-lo provider themselves as a form of a real estate trust.
One of the core issues for enterprises, when considering a host provider, is loss of IT control. This could include access rights, management and the security of their IT in the host provider facility. If Enterprise IT thinks THAT’s bad, consider the host provider taking equity capital, or even the enterprise as per my two scenarios. – Then we’re no longer just talking about loss of control of IT, but now can ponder loss of decision-making power over your own company!
For the enterprise, regardless of how a data center is funded, there is a cost of capital associated with that funding. Debt financing has an interest rate charged to it, and equity financing has some combination of share value dilution or dividend expectation. Even the use of existing cash has a cost of capital associated with it because its use means it is not available for other higher revenue-generating assets for the company. So NOW we’re seeing why CFOs are looking over the shoulder of CIOs as the latter determines their data (center) sourcing strategy.
These are interesting times for both the co-location industry, and also their potential customers as their respective parts in the supply and demand equation play out.
There is another route, new and interesting, which can be seen as game-changing, and I’ll be blogging about that in a couple of days, so stay tuned.
In the meantime, what are your thoughts on the subject? You can message me on Twitter @IJ_DCconsulting.