The Future of Data Centers: Can the Sector Grow Sustainably at Scale

Shaped by evolving consumer behavior, enterprise needs and economic instability, the data center market is presented with unique challenges and opportunities which it will have to navigate for years to come.

In the sixth and final episode of the series we are honored to welcome Co-Founder, former CEO and Member of CyrusOne’s Board of Directors, Dave Ferdman, to the podcast.

Guided by our Host, Matthew Pullen, EVP & MD Europe at CyrusOne, and against the backdrop of an incredible career with CyrusOne spanning well over 20 years, we explore what’s next for the data center and the industry more broadly. Dave candidly outlines the very real challenges of growing a data center business, even at scale, sustainably.

We hope you enjoy Dave’s perspective on the data center industry and appreciate his unique insight. Thank you for listening, we’d love to hear your thoughts, so please don’t forget to like, share, comment and subscribe.  

Visit CyrusOne website.

Guest:
Dave Ferdman, Co-Founder and Board of Directors, CyrusOne

Transcript

Dave Ferdman (00:05):

As we have changed our design, we have been able to reduce our price to help continue to make technology affordable. When we go forward and we start seeing a massive explosion in artificial intelligence, in robotics, in 5G ... which is this whole machine-to-machine, which is going to double the amount of data on the planet every eight months ... that same principle will apply.

Matthew Pullen (00:40):

So welcome back to the CyrusOne Connects podcast. My name's Matthew Pullen, EVP and Managing Director Europe at CyrusOne. The topic for today is the data center of the future, and we are extremely privileged to debate the topic with Dave Ferdman, founder, former CEO and board director at CyrusOne. So Dave, you must be seriously proud of what you've achieved in establishing CyrusOne as a company regarded as one of the largest global providers of colo services, having started the business just 20 years ago.

Dave Ferdman (01:12):

Thanks for inviting me to your CyrusOne podcast. And yes, I'm very proud. Very proud of the team, very proud of what has transpired over the last 20 years,. But more importantly, what we're about to embark upon in the next 10 years is insane. It's amazing how the growth we're seeing is actually coming to fruition and what we've talked about for years, so thanks for having me. Excited to talk about it.

Matthew Pullen (01:39):

A lot of people are saying it's difficult for colo to keep pace. How would you respond to that in the context of the CyrusOne portfolio in the US and Europe?

Dave Ferdman (01:49):

It is going to be tough to keep pace. The demand is so significant across so many different secular demand contributors that keeping pace in a non-sustainable world would be difficult. But keeping pace in a world where sustainability is front center and top of list on everyone's agenda, having sustainable scalable data center capacity is going to be difficult. And while we're a large platform, it's going to be difficult for us. So it's certainly a challenge. It's a challenge we're excited about. But nonetheless, nobody is thinking about this as a layup. It's going to be tough.

Matthew Pullen (02:29):

And moving away from the US and Europe, how do you respond to that in the context of the opportunities in other territories that arguably are few years behind, certainly, the US, such as LATAM and Asia-Pacific?

Dave Ferdman (02:45):

Well, I think the same pattern we saw, where Europe caught up to the US as far as growth, is now going to be happening and is happening in LATAM and in APAC. And fundamentally, what we're seeing is the same challenges. It's difficult to procure utility. It's difficult to procure land. It's difficult to find places where all of your moons and stars align with respect to latency and all the other components that we look for a big scale sustainable opportunity. And so I believe Latin America is right on the heels of Europe and I think Asia-Pacific is in line, and we're going to see exploding growth over the next five years. I think we're going to see 40% to 50% growth, and those markets are going to be leading the way from a percentage perspective.

Matthew Pullen (03:36):

I mean, those are amazing numbers. But you've mentioned a few times the notion of scale. So are you saying that, really, the only way of keeping up with demand is through developing at scale? Is that what we're saying?

Dave Ferdman (03:50):

That is what we're saying and we are seeing that, where our customers are requiring larger and larger and larger capacities. And fundamentally, they are building out larger network nodes within these data centers. And so what happens is the larger the network node, the more compute you can put into that facility. We're seeing step functions that we've never even envisioned before. And fundamentally, if you think about the next 10 years, there's no way to do that without massive scale. So the sites you're picking, Matt, over in Europe, and I'd love to turn it on to you ... When you are all looking, when the team is looking in Europe, you certainly have a completely different profile, I would assume, than you did five years ago. And so imagine trying to do that in some of the countries in Latin America and Asia-Pacific.

Matthew Pullen (04:46):

Yeah, Dave, I agree with that. I guess we've seen in Europe, following the US, average size of data center, maybe the beginning of the hyper-scale phase, started at 10 MB. We're now at 30 to 40, but with a runway required by most customers, hyper-scale customers, to 60 MB on the same site, so I agree. But you touched on a few really interesting issues to do with the headwinds that might make developing at scale difficult, and you touched on three things in particular. Firstly, the competitive landscape for land. Secondly, the limited availability of power. And thirdly, supply chain issues, and I guess that really relates to OFCI, which is the operator-facilitated contractor installed. So the M&E equipment, essentially. So those three things, do you mind just commenting on how you see headwinds relative to those?

Dave Ferdman (05:43):

What we look for ... and I'll speak about CyrusOne because I certainly couldn't speak on behalf of my peers ... is we are focused on the key digital gateway markets. So we're focused on the biggest markets where we know data gravity is happening. We know explosive demand is not going away. When we are focused on these markets, obviously we are not the only ones focused on these markets. So the demand for the similar portions of land is going up. And so when you think about that, prices are going up and you have to be more and more creative. And Matt, look, your team has insane and amazing background in real estate. That's the first piece. It's land. It's the first domino in the chain. But in addition, sustainable power. And what you all have accomplished in Europe, 100% renewable, is incredible. It's the pride of CyrusOne's sustainability platform and we're excited.

(06:43):

But to get there and to be able to plan out to '24, '25, '26, '27 and know that you're going to have enough utility, sustainable renewable utility, that requires relationships with utility providers. It requires approaches that are a little bit unique because these resources are constrained, and people are waking up to the fact that there is this significant pull on those resources. And so land is more competitive in the more dense areas. Utility is scarce. And you mentioned OFCI.

(07:24):

Look, there's only so many manufacturers of breakers and mechanical electrical equipment and everyone's fighting for the same gear, whether you're a large utility or whether you're a data center. And so yes, that has become a strategic part of our business. We're actually buying two years out, making material financial commitments to our suppliers. If you are a smaller company, that's going to be difficult to do, but if you're able to give orders or POs to some of these manufacturers ... to the extent we, and probably some of our peers, are doing ... you're going to be in a better position and a higher probability of beating the supply chain challenge. But a smaller company, you might have land and utility. I don't know how you're going to build a data center without mechanical electrical gear. It's impossible.

Matthew Pullen (08:16):

That's so interesting because you've kind of hit why CyrusOne is able to differentiate itself with the scale of its balance sheet, and I guess that's enhanced in a private capacity. You've touched on why it's harder for smaller companies. But I think that last points were worthy of further discussion in that for a smaller company, when land values in some parts of the world might be reaching 12 million an acre, we're talking about having to develop at scale. Therefore, potentially sites of 20 to 30 acres requiring significant capital outlay because customers demand site to ownership. And then, with the requirement to pre-order OFCI to be able to deliver within reasonable timeframes ... I mean, it's a pretty daunting business model unless you're at scale.

Dave Ferdman (09:10):

It is. And if you're not at scale and you're not building all of these capacities at once, or in one project phase or very large project phases, your unit cost, if you get down to the kilowatt, it's astronomical. And so in order to get to a place where you can offer your customer a competitive price, you really have to be doing these things at large scale, so your price at each and every level comes down when you're building at scale. The things driving this market right now, which is just massive cloud adoption, artificial intelligence, 5G, robotics, all of these things are not stopping. They are at the very beginning. In baseball terms, we're in the first inning still of some of these things, maybe the third inning of cloud adoption. But the newer technologies I referenced, we're at the beginning. We haven't seen the explosion in data that we're about to see. And so you have to get to scale from a cost perspective, but just in order to satisfy what's coming.

Matthew Pullen (10:24):

I guess, Dave, that frames your enthusiasm for the industry because you founded the company over 20 years ago. I think it's probably fair to say ... although, you comment ... that I don't think you and Visage would be where we were today in terms of facing this cliff of growth. But I guess you're glad you stuck with it. You're glad you stuck with the industry. I know CyrusOne is extremely glad you stuck with them.

Dave Ferdman (10:50):

Back in the day, we looked at Moore's law. "Moore's Law, Moore's Law. How are we going to predict the future?" And we never thought Moore's law would triple and then quadruple. First of all, I've always had a passion for the industry. I've always had a great passion for the people at CyrusOne, and so thrilled I've always stayed involved from an advisory perspective while I was not part of the team. Thrilled to be back as part of the team. And I definitely don't see the demand or the need for CyrusOne. The problem we solve is still relevant, and I think that's most exciting about any entrepreneur. You start as an entrepreneur and you say, "Am I solving a real problem?" And I can still say that CyrusOne is solving real problems. They're just really big problems now.

Matthew Pullen (11:44):

Yeah, indeed. So we turn now to a pretty serious topic, which is sustainability. And I guess I wanted to ask your view of what's driving CyrusOne's sustainability agenda? Is it customers? Is it regulation? Is it because we feel it's the right thing to do or, indeed, is it something else?

Dave Ferdman (12:06):

Well, I'm going to check all of the above. Fundamentally, it's the right thing to do. I mean, we're all living in a world where we're reminded more and more frequently about the realities of what's happening with climate. And customers, they are very, very, very focused on this. Because according to Gartner, by 2025, more than 90% of organizations are going to be making cloud-based decisions based on sustainability records of providers. So our customers are extremely focused, hyper-focused, hyper-scale, on our ability to help them to attract customers. That's one data point that we see. So it's not only our customers. It's our customers' customers are focused on this. And so what we see is carbon emissions of hyper-scale cloud services are really, really, really a big focal point as companies are adopting the cloud.

(13:19):

The other thing I can say is when it comes to regulatory environment, the regulatory environment is always something we have to keep ahead of. When you build a data center, you're making very, very long-term decisions. These are assets that are in place for many, many years, like the power plants of our parents. You need to do it right, and you need to make sure that you're in compliance and you're going to stay in compliance for both your customers and the regulators. The regulatory environment is always going to be important, so your designs have to be future-proofed. And your customers are important. But at the end of the day, we employ lots of people, and there's one theme of people at CyrusOne. They want to know we're doing the right thing. And so as a company, the tone at the top has always been, "Let's get ahead of this."

Matthew Pullen (14:12):

Completely agree. So just drilling down, just on one small point. From a regulatory perspective, what do you anticipate?

Dave Ferdman (14:21):

Look, we anticipate the regulatory environment is never going to get easier. The regulatory environment has forward. They don't have a reverse. So especially in these key markets ... when you're dealing with water, when you're dealing with air quality, when you're dealing with all the things that people are paying attention to ... the more and more data centers that are being deployed, the more and more people are waking up, and the more and more that's going to translate to political and regulatory pressure. We do not anticipate, nor do we plan for, the regulatory environment easing up. And so we think about design. How do we then solve that riddle? It's a riddle. It's tough. It's all about the design and really staying on top of new technologies that could help us to stand out. But the regulatory environment, to be very, very specific. Is not going to let up.

Matthew Pullen (15:15):

Yeah. I mean from a European viewpoint, Dave, I completely agree with you. I just hope there's some room for self-regulatory initiatives, which I think there probably are. And obviously, you and I together are big advocates of that. But it's interesting. So just again, picking up on a few things, what we are boiling down to. So we talked about the need to develop at scale, but the need to develop sustainable data centers at scale. You've touched on some design issues, but what do you think is going to change? Is it increased densities? Are we moving towards free air cooling? Where are we going, do you think, with the broader design of data centers? What are they going to look like in your view, or do you think they're going to look like?

Dave Ferdman (16:12):

Yeah. I mean, look, fundamentally, everything you mentioned has to be approached. We're in closed loops, so we're water-neutral in many, many markets. We are obviously focused on renewable energy. We're looking now, in certain markets, at battery storage as primary power, to where you can actually have battery storage and use the grid as a backup. That's many years out. But we're already talking to some of our partners through our new investors that have these types of storage plants that could potentially really change the design of a data center from a power perspective. From a cooling perspective, we've got to remove the heat. I mean, let's not forget we're basically millions of little furnaces burning in these data centers called processors. They kick out a ton of heat and we have to remove the heat. And in certain markets, I think there's going to be some free air cooling. Other markets, it's closed loop systems. But in any scenario, we've got to trap the heat. We don't want to contaminate the cool air. We need extreme efficiencies to remove the heat, and so there's lots of new technologies and designs.

(17:20):

Unfortunately, not so much at the chip level. It's at the data center to minimize the heat and make sure that we are able to be efficient. But everything is on the table, whether it be roof design, whether it be how we get our utility, whether it be do we go with natural gas type generators versus diesel. We're looking at other types of backup power solutions and we're seeing some people try different things, but it's just not quite at scale yet. So when we look at these different new technologies, there's a lot of things out there that are coming out that can do small scale. We need large scale. So we're pushing quite a few manufacturers to get to scale with respect to some of these new sustainable opportunities.

(18:07):

From a design perspective, we have been ahead of the design curve at CyrusOne forever. That's always been our claim to fame. We feel like density really, really helps. We've been in the density business for longer than anybody. And so we feel really, really, really good about how to manage and operate high-dense data centers, whether it be superpower density or just massive scale.

Matthew Pullen (18:35):

So Dave, I think there's no doubt we can optimize development costs. I think through the debate on the headwinds, it'd be nice if we can see some help from the market as it relates to some of those headwinds, including inflation.

Dave Ferdman (18:50):

There's no question. We're having strategic conversations with our customers. We're such a transparent organization that as these changes have occurred, we are focused on working with our customers strategically to make sure we can still satisfy what they need, but also take care of our other stakeholders. All of these things have to be kind of wrapped together and delivered to multiple different stakeholders. We look at all of these inputs including, unfortunately, the supply chain and inflation right now, but we do it in a transparent way. We don't know what the outcome will be. I don't think anybody really does. We do it openly in the spirit of we're really all working together.

Matthew Pullen (19:36):

Dave, agreed. But I think what we're talking about is not just the data center of the future, but the data center industry of the future. So Dave, thank you so much for taking the time to talk to us today. I hope our listeners enjoyed the conversation and took as much from our conversation as I did. We very much hope you'll join us again on our podcast, CyrusOne Connects.

Dave Ferdman (19:59):

Thank you, Matt. I enjoyed the conversation.

Matthew Pullen (20:11):

And that concludes series one of CyrusOne Connects. It's been an honor to speak with colleagues and peers on the issues affecting our industry, digging deep, and working out what we are doing well and where we can grow and move forward. From sustainability to the skills gap, and everything in between, we've only just scratched the surface in terms of the issues touching and influencing the data center industry. So we look forward to continuing the conversation in series two. On behalf of me, Matt Pullen, and everyone at CyrusOne, thank you for listening. Please do share on social and tag CyrusOne. Like, comment, and use the hashtag, #CyrusOneConnects. And if you have any ideas for future topics, we'd love to hear them. Have a great rest of your day and we'll see you soon.