The year just ended saw an unprecedented wave of consolidation in the data center industry as the world's largest colocation providers looked to keep pace with demand from enterprises and public clouds by acquiring regional competitors.
The $20 billion in mergers and acquisitions closed in 2017 far exceeded spending from the two preceding years combined—with 2015 seeing roughly $6 billion in activity through 17 deals, and 2016 roughly $10 billion through 28 deals, according to a new report from Synergy Research.
The surge to 48 data center consolidation deals in 2017 is part of a trend that will likely continue for some time, wrote Synergy's chief analyst, John Dinsdale, in the report.
"We expect to see much more data center M&A over the next five years," Dinsdale said.
Consolidation is being driven by enterprises divesting from their own infrastructure, and cloud services providers looking to rapidly scale into new geographies. Four more deals totaling $2.6 billion in value are already pending, according to Synergy.
The vast majority of the 2017 spend came from Equinix and Digital Reality. The industry's two leaders paid out between them $19 billion on acquisitions, even before counting Equinix' deal for Metronode, an Australian company.
Digital Reality paid $7.6 billion for DuPont Fabros in the largest single purchase of 2017.
Equinix has made major acquisitions around the world, Synergy noted, while Digital Realty has focused on the United States and Europe. CyrusOne, Peak 10, Digital Bridge, NTT, Carter Validus, Iron Mountain, Cyxtera and Elegant Jubilee also took part in last year's M&A surge, according to Synergy.
Regional data center operators looking to succeed in a landscape dominated by wholesale giants that will only continue growing bigger must focus on offering differentiated services, the leaders of two boutique providers told CRN.
Lief Morin, CEO of Key Information Systems, said his Los Angeles-area data center business is experiencing a "microcosm of that larger trend" in market conditions that's driving consolidation among the global colocation providers.
Businesses are rapidly moving their IT operations off-premises and into colocation facilities or public clouds, eliminating risk that doesn't lend those companies any value, Morin said.
"You got companies all over the place, they have closets with servers in them, they're trying to get them out of those closets and put them into a formal data center, then setup networks to constantly communicate with those data centers," Morin said.
Amid that acceleration of IT outsourcing, the largest colocation providers are investing to ensure they have the capacity "to capitalize on the longer tail of that whole lifecycle of technology services," Morin said.
Those providers need to expand their geographic presence to meet the needs of multi-national enterprise clients who want to minimize latency while ensuring compliance across countries.
"In the technology space, scale matters," he said.
Kevin Goodman, managing director of BlueBridge Networks, a boutique operator of data centers in Ohio, told CRN that hyper-scale cloud providers growing into secondary markets where it doesn't make sense for them to build their own facilities are also playing a major role in the consolidation trend.
The proliferation of data, and modern applications like Internet of Things, predictive analytics, artificial intelligence and big data, are forcing those clouds to get closer to customers through leases with "wholesale megawatt providers," Goodman said.
"In a world in which milliseconds matter, you see a lot of the large data centers utilized by cloud providers and SaaS providers," Goodman said. That encourages the data center providers to expand their wholesale businesses.
Just like the cellular industry in previous decades, consolidation will be an unstoppable force in the market, Morin told CRN. It's likely that many midsize data center operators will be swept up in the acquisition sprees of the future.
But smaller players can remain highly competitive by "managing their strengths," Morin said. That means serving a niche.
While some regional operators could jump on the bandwagon by looking to be acquired, Goodman said, "boutique shops that differentiate themselves, do what they do in an exceptional way, that's also a recipe for success."
The mega-providers have gotten better at customer service.
But "human relationships, pointing to the cluster, knowing your customers' business and IT objective, that's where the regional player has to compete," Goodman told CRN.