ANALYSIS: Should resellers build their own datacentres?
The temptation to build your own datacentre might exist, but a lot could go wrong
The cost of some resellers' datacentres may emanate as an outgoing which could switch columns on the balance sheet.
Microsoft, Amazon Web Services (AWS) and Google have built data-focused businesses which fuel huge profits for the tech giants. If only a channel firm could grab a slice of this market for its own end users and potential new clients, it would be an opportunity which pays for itself. However, the reality is both tougher and very different from what the industry witnessed a decade ago.
Despite this, the temptation to spend to save by building a datacentre remains for some resellers. So is it a good idea?
To build or not to build
Eric Herzog, VP of worldwide storage channels at IBM, told CRN that it is possible for a reseller to succeed in building its own datacentre. One of IBM's key resellers in the US built its own datacentre and it is making money out of it.
"However, it is size dependent and you need the right costs base," said Herzog. "It is also a different billing model, because the business model is different. If you are a reseller today, most of what you sell to your end users is software or a system. If you build a datacentre, whether you are going to do managed hosting or cloud services, your billing is weekly.
"So your business model shifts, which affects how you do your accounting and it affects your cashflow. You will not be billing clients for a million-pound deal; selling a datacentre deal will be billed as an ongoing service."
"It depends on your outlook," said Lawrence Jones, CEO of UKFast. "Many years ago we were spending millions of pounds as one of Telecity's biggest customers. We went on to be described as the biggest customer Telecity ever lost at that time.
"We had hundreds of racks with them, but the datacentre was continually going down and the service we got was very poor. So we decided we needed to take ownership of that.
"Customers are very important and the service we were giving them was appalling at times and we had no control over it. We had control over our other services, such as telephone support, but we could not control the datacentre element."
Jones said UKFast opted to lay out nearly £5m for its first datacentre, which could be justified because it was saving £2m in fees that would have gone to Telecity.
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ANALYSIS: Should resellers build their own datacentres?
The temptation to build your own datacentre might exist, but a lot could go wrong
"If you roll on the clock six or seven years, we have built four datacentres and they have got much, much bigger. We have spent over £100m in that short period of time," said Jones.
"If someone asked if we would still have done it knowing it would cost £100m, for me the answer is ‘yes, 100 per cent'. However, this is the question you have to ask.
"This is because the service we offer is more important to my customer than how much it costs to build and run. However, we are a bit of an anomaly - most companies could not afford to spend £100m in seven years to stay on top of the technology and the running costs."
Jones explained that UKFast also has a critical power director, while other companies use a consultant instead. If an issue occurs, firms have to wait four hours for this consultancy to come in, get up to speed on everything, and try to solve the problem.
"For us, that's too long. We have had one outage on our datacentre and that was seven minutes in total. Our critical power director was on-site and was able to solve the problem.
"I have a lot of customers who have previously had their own little datacentres, or were looking to build one, who now piggy-back off someone like us. This is because you have the network, the 24-hour support, the infrastructure, the critical power director, all for a fraction of the cost," added Jones.
Oren Yehudai, head of EMEA channel partner programme at Equinix, said the major consideration for resellers is financial.
"The sort of capital needed to purchase tier-one datacentre space is beyond the reach of most, if not all traditional resellers," said Yehudai.
"Indeed at a strategic level, tying up significant capital in what would be a speculative asset really goes against the everything-as-a-service model, and would constitute a major risk for all but the largest companies.
"In today's economy, business leaders evaluate investment decisions differently from the past. In the same way that 30 years ago enterprises developed their own CRM systems and are now going to specialised cloud providers for it, resellers need to decide what they do in-house and where they partner."
Equinix instead courts business with resellers, with the firm snapping up datacentres around the world, including buying Verizon's 29 facilities for $3.6bn (£2.8bn).
"Ultimately, datacentre build and management is our primary business. Why would you build and run your own datacentre, exposing yourself to significant risk, when you can leave this to us and focus on adding value for your customers and successfully growing your business?" argued Yehudai.
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ANALYSIS: Should resellers build their own datacentres?
The temptation to build your own datacentre might exist, but a lot could go wrong
Times have changed
One channel player that had datacentre investments but saw the tide turning was Daisy Group. In October Daisy announced a partnership with Microsoft Azure to reduce its datacentre footprint.
"A decade ago, there was a good argument for a reseller to ‘build your own'," said Nathan Marke, chief digital officer at Daisy Group. "Back then, customers were contemplating leaving the comforts of their on-premise environments for the first time.
"The wholesale datacentre market was yet to emerge and having a provider down the road that offered space better than yours that you could easily visit and wrap around value-added services made a lot of sense."
A lot has changed in the last 10 years, said Marke, and operating datacentres is now a scale game.
"Several global players dominate the market, providing high-tech space, super-reliable systems, impressive green credentials and all the power and connectivity you could ever want," said Marke.
"As fond as we all might be of our local datacentres, they cannot compete on price or specification with the giants who act more like commercial property landlords than technology businesses.
"Add to this the fact that networks have sped up, and management tools evolved, then we find that even for low-latency applications, datacentre location is now much less of an issue than it was," he said.
Marke said Daisy has never built a datacentre and has never thought of itself as a datacentre operator.
"We view ourselves as a capex-light aggregator of services, standing on the shoulders of the capex-heavy IT, telecoms, cloud and datacentre giants and curating services that are valuable to our customers," he explained.
"We have acquired a variety of datacentre assets as we have built our managed services capability over the years. But the datacentres were not the reason for the acquisitions. We acquired for customers and capability.
"Our datacentres are high quality, reliable and secure. However, when set against the scaled giants, they are more expensive to operate and not as well specified."
Marke said Daisy will gradually scale down its own footprint and mostly sell new into wholesale datacentres over the next few years.
"We see this as an organic process where we will move at the pace of our customers as they embark on the next phase of the evolution of their IT infrastructure. For me, if you are contemplating building a datacentre today then you need to have a very focused business case. The market is being disrupted in a similar way to the way in which Amazon has disrupted retail," he added.
Yehudai said that owning and operating a datacentre is a far more complex proposition than it was just 10 or 15 years ago.
"Datacentres need the highest standards of physical and cybersecurity to cope with new and evolving threats. The traditional datacentre requires a big upfront investment; as well as building the datacentre, there are all these costs and efficiencies in managing it," he said.
"From a commercial standpoint, the offering needs to be competitive with the scale, scope and price of the hyperscalers who are aggressively investing in the datacentre business."
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ANALYSIS: Should resellers build their own datacentres?
The temptation to build your own datacentre might exist, but a lot could go wrong
'Why we said no'
When you speak to resellers about the prospect of investing in their own datacentre today, interest in the risky venture is largely muted. Many feel there are more effective and economical ways of approaching the issue.
"We took a strategic decision not to invest in our own datacentre," said Andrew Griffiths, business development director at reseller Q Associates. "We prefer to partner with specialist datacentre providers according to our specific client needs.
"This might include variable factors such as physical location, cloud connectivity, security accreditation, performance and links with specific public sector networks such as JANET, PSN or N3.
"Our core expertise lies with datacentre technology and data management, rather than the physical datacentres themselves. We therefore chose to focus on our primary skills and partner with a number of selected organisations who really understand datacentres, datacentre economics and related comms."
Griffiths said Q Associates' clients are increasingly moving towards hybrid cloud IT deployment and consumption, including IaaS, PaaS and SaaS across multiple simultaneous providers.
"Our strategy now enables us to offer datacentre and cloud-based services to meet these needs, without the physical, geographic and economic constraints associated with owning and operating our own datacentre," he added.
Neil Roberts, group managing director at Yorkshire-based VAR Concorde Technology Group said he has a vast background in datacentres, having built 22 of them for ICM Computer Group between 1996 and 2007.
"Back then it was a fantastic business. We were turning over tens of millions of pounds with people moving their infrastructure to secure and resilient datacentres. However, we are in a different time now and there are providers such as Microsoft and Amazon, who can provide it much more cheaply. You have to be able to give customers a choice of public, private or hybrid hosting and that is what our cloud strategy is underpinned by," he said.
"In our head-office premises, we have an area which was originally earmarked for a datacentre suite, but I will not spend the money because there is no need, given the current overcapacity in the market. I have a series of racks across the UK in someone else's datacentre, and it costs me one tenth of what it would to operate a datacentre."
Roberts said one reseller who was caught out investing in its own datacentre had even underestimated the power costs of the venture.
"It was costing them £20,000 a month to power the datacentre. You have to sell a lot of high-end, high-margin services quickly to get a return. The world has moved on; we are into commodity hosting now," he said.
"I will not say it is over - there is still a need for hosting for certain customers. We offer a blend of services. We have Microsoft Azure, AWS and we have our own private cloud too. But building your own datacentre today is a very risky move because the costs far outweigh the gains."
And that is the simple equation that faces resellers considering buying their own datacentre: will your gains outstrip your costs? Only by absorbing huge upfront costs and vast ongoing costs can resellers truly answer that question in the affirmative.