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Colocation pricing morphs into cloud pay-per-use model

Cloud computing users have been able to pay just for what they use, but that hasn't been an option for colocation customers -- until now.

Cloud computing charges its customers only for what they use, but data center colocation providers -- many of them home to cloud computing providers -- have stuck to a billing model based on a long-term commitment to space, power and cooling.

One company wants to change that. Aligned Data Centers, based in New York, is bringing the cloud computing pricing model to the colocation data center market.

Many cloud providers have different pricing models at each end of their business; they charge their customers for only what they use, but pay their bills to colo providers based on space, power and cooling commitments that may far exceed what they use.

"They are used to that [pay only for what you use] world, and there has always been a disconnect with the data center world," said Jabez Tan, senior analyst at Structure Research Ltd., based in Toronto. "It is, in essence, speaking their language."

Customers that may be attracted to the new pricing model include financial institutions, cloud providers and managed services providers, said Thomas Doherty, COO at Aligned Data Centers.

"They are in a tough spot in terms of the cost margins," Doherty said. "Our customers see this as a cloud model for infrastructure."

The new colocation pricing model offers the control and security of a private data center, with a price that is closer to public cloud computing, he said.

"It's all about control -- they are able to control their data center infrastructure," Doherty said.

So far, Aligned does not have customers it can publicly name, he said. Aligned has a data center in Plano, Texas that is expected to go live in late November, and the company is in discussions with several customers, Doherty said. In Phoenix, the company broke ground a few weeks ago on its second data center -- a 550,000 square foot, 50 megawatt (MW) facility -- it expects it to be up and running in early 2016.

How pay-per-use colocation pricing works

The pricing model for Aligned works like this. For example, a 1 MW customer needs 10,000 square feet of space over a 10-year term. The cost per square foot per month is $5 and the cost per kilowatt (kW) per month is $130, with a guaranteed power usage effectiveness (PUE) of 1.15. It starts with an upfront contract power commitment of 300 kW and contract space commitment of 5,000 square feet. It comes to an initial contract commitment of $468,000 and a cost of $18.8 million over the term of the contract.

A colocation provider with a higher PUE would charge $21.2 million over the term of the same contract, according to Aligned. Assuming the cost per square foot would be zero, the cost per kW would still be $130, but the PUE would be higher at 1.3. The upfront contract power commitment would be 1,000 kW, versus 300kW with the pay-for-what-you-use model, and an upfront space commitment of 10,000 square feet.

[Cloud providers] are used to that [pay per use] world and there has always been a disconnect with the data center world.
Jabez Tansenior analyst, Structure Research Ltd.

"It is not a pure pay-as-you-go model," Tan said, since users are billed in increments, but it is the closest he has seen yet to the cloud billing model in the colocation market.

For comparison, a pay-for-what-you-use model in everyday life would be paying for only the electricity you use or only the amount of gas you put in your vehicle at the pump.

Aligned's model is closer to what a mobile phone customer may see. For example, a customer that uses an average of 2 GB of data per month and may have a 3 GB plan, not a 10 GB plan. While the mobile phone customer may not pay for exactly what they use, it is more aligned with their usage pattern versus committing to a plan to cover the heaviest usage month or the possibility of a future spike in use. Instead, they can simply bump up their plan if needed.

DCIM underpins the pay-per-use model

Aligned will use its data center infrastructure management (DCIM) tool, developed by sister company Energy Metrics, as a supply-chain tool to gauge when more space will be needed. It will also open up the data from the DCIM to its customers.

"Our customers -- we really want them to be part of it," Doherty said.

Doherty said the company has encouraged prospective customers "to go long" on space, since they will only be billed for the power and cooling they use. That is one way they are making sure there's room for expansion.

Aligned can also vary the power load in each rack, from 3 kW to 25 kW. Decisions about square footage can be made separate from power and cooling, he said.

Advancements in DCIM allow Aligned to use the "pay-for-what-you-use" model, said Kelly Quinn, a data center trends analyst at IDC, based in Framingham, Mass.

The closest thing to Aligned's billing model in the market right now is from 365 Data Centers, Tan said, which offers space down to a third of a cabinet with month-to-month contracts.

CyrusOne, LLC, and QTS Realty Trust, Inc., also have agreements with some larger clients to pass along the power bills to them. The pay-for-what-you-use billing model has been around for several years for cloud customers, so why hasn't anyone tried it for colo until now?

The colocation market has been run largely by real estate professionals that have a background in leasing office space. They applied that leasing model to the data center world, Tan said.

Colocation pricing needed a change

A new billing model for colo space may have been inevitable. More than a year ago, Robert McClary, senior vice president and general manager at Fortrust, a colocation data center operator based in Denver, told SearchDataCenter "the real estate model of colocation is out of date." The idea for Aligned's new pricing model has been in development for several years. Before starting the company, founder and CEO Jakob Carnemark had been building large enterprise data centers.

"He saw the tremendous waste that was going into it," Doherty said, adding that the new model combines technology and business solutions to solve a problem. "This isn't something that happened overnight, we have been working on it."

The biggest challenge was coming up with a solution, he said.

The customers it signs early-on may set the tone for the future of the company, Tan said.

 "I think it will get attention," he said, adding he will keep an eye on the company's progress as it looks to expand into Tier 1 markets, including Chicago, Ashburn, Va. and Santa Clara, Calif.

Many cloud providers depend on cash flow and a lower upfront commitment may help, Tan said.

IDC's Quinn said the pricing model may help "cost-sensitive, bootstrapping" organizations by allowing them to keep closer tabs on IT costs. They can allocate critical workloads to the colo space and then shift loads when they approach their budget. The pricing model also opens up opportunities for smaller cloud computing providers.

The question remains whether Aligned can pull it all off and deliver on its promise of a 1.15 PUE and to reduce the three to six month lead time to add data center capacity down to eight to 12 weeks, Tan said.

However, Aligned is part of a larger organization that includes divisions that offer data center infrastructure management tools and carbon engineering. In addition, Aligned is able to guarantee the PUE thanks to cooling technology developed by its sister company Inertech, LLC.

Robert Gates covers data centers, data center strategies, server technologies, converged and hyper-converged infrastructure and open source operating systems for SearchDataCenter. Follow him on Twitter @RBGatesTT or Email him at [email protected].

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