Digital Realty Expands Its Colocation Business update from April 2012

365main-sanfran

The 365 Main Street data center in San Francisco has been the primary colocation facility in Digital Realty Trust's 100-property portfolio. Digital says it is seeking to expand its colo business.

Digital Realty Trust, the world's largest provider of wholesale data center space, is expanding its colocation business. The announcement reflects the blurring of business boundaries in the data center space, where wholesale providers and "retail" colocation companies are increasingly competing for the same tenants.

"We're expanding our colocation offering in certain of our Internet gateway data centers and other select facilities," said Michael Foust, CEO of Digital Realty, said yesterday on a conference call with analysts. "Our goal is to convert underutilized space and facilities where we believe we can achieve a higher ROI if converted to colocation space. This space is typically located in buildings and markets that are currently underserved.

"If you look at total gross revenues of our current colo business, it's about $55 million and we'd like to see that double in 3 to 4 years," Foust added. "That may be a little ambitious, but I think with the space we have available, it's something that we can achieve."

Wholesale vs. Colo

In the wholesale data center model, a tenant leases a dedicated, fully-built data center space. In colocation, a customer leases a smaller chunk of space within a data center, usually in a caged-off area or within a cabinet or rack.  The wholesale approach has typically been of interest to companies seeking larger footprints. But in recent years wholesale providers have been pursuing smaller deals, bringing them into head-to-head  compettion with colo providers on some requirements. Some industry observers say the competition has lead to pricing pressures in some colo markets.

Digital Realty has historically focused on the wholesale space, offering finished "turn-key" space. The company got into the colocation business in a meaningful way with its 2010 acquisition of the portfolio of 365 Main, which included a large colocation center in San Francisco.

Focus on Internet Gateways

Foust says Digital Realty will focus its colocation efforts on its Internet gateway properties, also known as "carrier hotels," which have extensive connectivity and staff available on site.

"It's really an opportunity for us to create value at the asset level in existing Internet gateway buildings with many networks and ISPs and other assets that we think blend themselves well for the colocation. We have space available that we think we can have a lot of value by building it out and leasing to the smaller footprint requirements."

Many of Digital Realty's wholesale tenants offer colocation services, but Foust said Digital's expansion of its colo offering didn't represent a threat to existing tenants.

"We've given large customers of ours first crack at the space," said Foust. "If other service providers want the space, we're happy to lease it to them more on a wholesale basis."