Colocation services: Cloud providers are leasing, not buying

With colocation services, cloud providers can take advantage of third-party infrastructure and expertise while cutting down on upfront costs.

Data center outsourcing isn't just a strategy for the enterprise anymore. Many cloud providers are choosing to lease space in a colocation facility, rather than built or buy their own data centers.

Data center consolidation is rampant across the IT industry as network administrators try to do more with fewer resources -- and cloud providers are no different. While some providers are focusing on putting more resources in fewer facilities, many are realizing they can take advantage of the data center colocation services that enterprises have long used.

"Other than huge technology companies, everyone is shying away from buying real estate and putting in the brick and mortar to build out data centers," said Roopashree Honnachari, program manager of business communication services for the Stratecast division of San Antonio-based Frost & Sullivan. "There is a shift happening within the customer base for colocation services. What was once dominated by enterprise customers is now becoming more managed services and cloud providers."

Colocation services give lower costs, extended reach to providers

Cloud providers need an efficient data center, but it can be very expensive to buy, install and manage hardware and power, as well as cool their facilities. Many providers -- especially cloud startups -- are unable to put their capital into building or outfitting data centers.

"Providers need to stay current and advertise to come up with a competitive edge, so they don't want to put all their money into a data center," said Kelly Morgan, research manager of multi-tenant data centers for the London-based consultancy 451 Research.

Even the big players -- like Google and Amazon -- are interested in leasing over buying, depending on the data center location and their local customer base.

"There may be times that larger providers find that it does make sense to lease space in another organization's facility -- like if they have a few customers in a specific location or region -- instead of building out a brand new data center," said Amy DeCarlo, principal analyst for security and data center services at Washington, D.C.-based Current Analysis Inc.

Colocation services can also help providers reach globally dispersed customers quickly. Cloud providers may need a disaster recovery site on the other side of the country, or proximity to a coast for fast international connectivity to Europe or Asia.

More on colocation services

Cloud unearths benefits of data center colocation services

Guide: Choosing colocation or an on-site data center

Colocation facility selection requires careful planning

Providers also need a robust network in order to deliver reliable services. Telx, a New York City-based colocation hosting provider, has noticed an influx of cloud service provider startup customers taking advantage of the provider's network carrier options, said John Freimuth, general manager of cloud and IT services for Telx.

"We are seeing most cloud providers -- whether they be startup or established -- using colocation … so that they can focus on what is core to their business -- like delivering IaaS [Infrastructure as a Service] or SaaS [Software as a Service]-- and not have to worry about supporting a service that will distract them from achieving the Quality of Service and economy of scale required in a cloud model," Freimuth said.

Telx serves a cloud provider that hosts services for its own retail, media and entertainment industry customers in the Middle East and Asia. "With our international connectivity options, this U.S.-based company was able to provide a high-performance, low-latency service that was critical to winning that business, [and] the provider was able to provision and implement this international network within a couple of days, versus the month or more it would have taken [it] on its own," Freimuth said.

When is it appropriate to build/buy your own data center?

While colocation services make it easy to enter the cloud market, building out or buying data center facilities still remains the right strategy for some cloud providers, depending on their customers.

Not all data is held to the same security standards -- like financial, health care and government data, DeCarlo said. "Some data needs to be in [Federal Information Security Management Act] FISMA-compliant, or [Health Insurance Portability and Accountability Act] HIPAA-compliant facilities, so it may be a better investment long-term for a provider targeting these customers to build out a facility that meets these standards," she said.

Leasing can also be more expensive over time, so providers should consider how long they will need to rent space, 451 Research's Morgan said.

"It's just like renting instead of buying a house. [Providers] might not be able to make the exact changes they want and could end up paying more over time," she said. "But if a provider is buying, they'll need a down payment."

More control over infrastructure still may not make owning a facility worth it for providers, Morgan said. "The provider's value-add comes from services on top of the infrastructure, so it's not necessarily a differentiator, whether they own the data center or not," she said.

Let us know what you think about the story; email: Gina Narcisi, news writer, and follow @GeeNarcisi on Twitter.

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