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Are private data centers an endangered species?

Businesses can save millions by leasing data center space rather than building their own, but some feel private data centers are the best bet.

Some enterprise IT shops can justify the cost to build and operate a private data center, but more and more organizations prefer to lease space from colocation facilities and service providers.

Zynga, the game development company, uses tens of thousands of servers to power its online games. When the company decided in 2011 to shift from public to private cloud, it did not build a data center – it leased space from a colocation facility, according to sources familiar with the project.

Do they have as much of an incentive to run that data center as well as you do?

John Stanley, 451 Research analyst

Another example is managed hosting and cloud provider Rackspace Inc. It owns a few legacy data centers, but increasingly turns to wholesale colocation when it wants to expand its geographic reach, said John Engates, Rackspace CTO.

Even Fortune 500 companies have gotten in on the act. Insurance giant Unum, for instance, said last month that it will rent wholesale data center space in Atlanta from T5 Data Centers.

“I would contend that most businesses have no business running a data center these days,” said Kurt Marko, an independent IT analyst at the Interop Las Vegas conference earlier this month. “Everything is getting denser and hotter. … And I don’t think the average organization is capable of handling those types of cooling loads.”

Today, the vast majority of data centers are still privately owned, but new data center builds have shifted toward multi-tenant colocation and service providers, said John Stanley, analyst for data center technologies at 451 Research, based in New York.

That jibes with research by Uptime Institute, a data center research and consulting firm, which recently asked 500 data center design professionals whether their business comes from enterprises or colocation and service providers. Enterprise data centers used to represent the lion’s share of data center design professionals’ business, but 31% said colocation and service providers now account for most of their business.

The high cost of a private data center
The main knock against building a private data center is cost. Construction prices for a private data center are approximately $2,000/square foot of raised floor space or $20 million per megawatt, said Jim Kerrigan, principal and director for data centers at Avison Young Inc., a commercial real estate firm headquartered in Toronto.

Wholesale data center providers, meanwhile, have costs that are less than half of that thanks to economies of scale and the distressed construction industry. Wholesale colocation provider Digital Realty Inc. in San Francisco claims construction costs of $800 per square foot and $800,000 per megawatt, said Kerrigan. In theory, colocation providers can then pass those savings on to customers.

Renting data center space by the month can be easier than spending tens of millions in capital to build a private data center. Compare building a 1 megawatt data center for $20 million with leasing the same load from a retail colocation provider such as Equinix Inc. Assuming 325 racks per rack at $600/month, leasing a 1 megawatt data center would result in a $2,340,000/year colocation bill.

That’s steep, but a far cry from $20 million.

Some data center experts say you need at least 50,000 square feet of raised floor before it makes sense to build a private data center, Kerrigan said. Others prefer to think in terms of IT load, where the tipping point is 2 to 3 megawatts.

When the time is right to build a private data center
For every Unum leasing wholesale colocation space, there are plenty of organizations that build their own private data centers. Several traditional brick-and-mortar companies including Chevron Corp., American Express Co. and Disney all built private facilities last year, Kerrigan said.

Fidelity Investments will break ground on a new data center facility in the Midwest this year, said Kevin Shinn, vice president of data center strategy, during ChefConf 2012 this month.

Building a private data center can make sense in certain circumstances, Kerrigan said.

On the finance side, the 2010 Reid-McConnell Tax Relief act provided 100% bonus depreciation on capital expenses, which prompted many large organizations to build their own private data centers in 2011, Kerrigan said. Regulated industries, meanwhile, find it easier to demonstrate compliance from a single-tenant facility.

But perhaps the biggest reason that companies still build their own facilities is because they want to, Kerrigan said.

“IT guys ultimately want to build their own data centers, because they want to have that legacy,” Kerrigan said. If they can convince their managers, “then you get buy-in up the ladder.”

One provider of custom modular data centers agreed.

“A data center build-out is the enterprise of a lifetime,” Chris Crosby, CEO of Compass Datacenters in Dallas, said. He added that data center professionals intent on building their own will do whatever it takes to justify the project.

“Don’t underestimate what you can do to make the numbers look good,” Crosby said.

For organizations that want their own facilities but suffer from sticker shock, Compass provides modular – not prefab – data center designs for about half the cost of a private data center build-out. The data centers come in 1 to 1.2 megawatt data center chunks and can be operational in five months once the proper permits are in place, Crosby said.

Ultimately, the decision to build or lease data center space often comes down to trust, not cost, said 451’s Stanley. 

“It’s not that a colo can’t run a data center as well as you do – they can.  But if your data center is down for a few hours, you could lose millions of dollars,” he said. “If that’s the case, you have to ask yourself: Do they have as much of an incentive to run that data center as well as you do?”

Let us know what you think about the story; email Alex Barrett, Executive Editor at, or follow @aebarrett on twitter.


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