Colocation Service Market Growth A ‘Great Sales Opportunity’ For Partners

Global spending on colocation services will grow to $38.8 billion in 2023, up from $25.9 billion in 2018, according to new data from IHS Markit.

The global colocation service market is expected to explode from $25.9 billion in 2018 to $38.8 billion in 2023, which bodes well for channel partners as more customers seek multi-cloud solutions, according to market research firm IHS Markit.

“There is great sales opportunity for channel partners with colocation providers,” said Alan Howard, principal analyst at IHS Markit for Cloud and Colocation Services in an interview with CRN. “Commissions are typically based on contract value, so not only is power and [data center] space an opportunity, but interconnection to the ecosystem of network and cloud providers as well. Enterprise adoption of colocation continues to grow, and the need to connect with network and cloud providers comes with it because multi-cloud is a trend driven by consumers needing to solve differing IT problems with multiple cloud solutions.”

With the global data center colocation service market expected to grow at a five-year compound annual growth rate (CAGR) of 8.4 percent through 2023, colocation giant’s like Equinix and Digital Realty are betting on the channel to solve customers needs.

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Twenty percent of bookings from Equinix in the last three quarters, as well as over 4,000 deals in 2018, came from channel partners -- representing about 50 percent of the company’s new logos, according to IHS. Similarly, nearly 20 percent of Digital Realty’s new logos added in 2018 came from the channel.

“These companies have significant sales and marketing functions, but they cannot replicate the market reach of the channel,” said Howard, who has more than 30 years experience in the industry. “Using the channel to sell cloud and colocation, and the interconnection that brings it all together, is something the service providers have focused on for awhile.”

IHS Markit expects interconnect revenue to continue to grow this year as more colocation providers realize the potential revenue boost and attractive margins it providers. In 2018, interconnect revenue grew 12 percent year over year driven by the increased need for cloud service providers (CSP) enterprises and telcos to interconnect with each other as well as with additional global providers.

The growth in data center colocation service spending comes as enterprises are expanding their use of multi-cloud to support organizations’ increasing need for varied cloud-based applications and infrastructure.

According to a recent IHS Markit survey on North American enterprises, respondents said they plan to increase the average number of Software-as-a-Service (SaaS) providers from 10 to 14 by 2020, while also expecting to increase the number of IT infrastructure providers – such as Infrastructure-as-a-service (IaaS) and Platform-as-a-service (PaaS) – from 10 to 13 by next year.

“With the increasing adoption of multi-cloud support comes the increased ability for more cloud providers -- large and small -- to be able to compete in the market, removing barriers of entry and silos,” said Devan Adams, principal analyst for Cloud and Data Center Switching at IHS Markit in an interview with CRN. “This should have a positive impact on the growth of the colocation market.”

Large hyperscale CSPs like Amazon, Apple, Facebook and Microsoft set a record in capex data center spending in 2018, investing a whopping $120 billion on building new and expanding centers as well as the products inside. The pace of data center capex spending by hyperscale operators is expected to continue this year.

Adams said CSPs as well as telcos will continue to invest heavily in data center equipment like servers, storage and networking from incumbent market leaders like Dell Technologies, Hewlett Packard Enterprise and Cisco, boding well for channel partners particularly in the short-term. However, he said that trend is likely to slow down as CSPs invest in in-house innovation.

“Many of these larger cloud providers are designing their own infrastructure equipment in-house and reducing their dependencies on these incumbent servers, storage, and networking vendors in the long-term,” Adams said.