The data center marketplace continues to be very dynamic, with lots of organic build-outs happening alongside ever-present consolidation. It’s a good thing too, since without all that work, the internet as we know it would outgrow itself in a year. One company that is enabling not only the internet, but also some of the world's most sustainable IT operations, is Infomart Data Centers. Infomart operates the Dallas facility from which it derives its name as well as data centers in Silicon Valley, Portland, and northern Virginia. With us today to talk about Infomart’s approach to the market, M&A in the sector, and the shift toward renewable power sources is the company’s President, John Sheputis.
TR: What are Infomart’s origins? What does your infrastructure look like today?
JS: Today's company is an amalgamation of two companies. About a decade ago, I founded a company called Fortune Data Centers, which was one of the early entrants into the wholesale space. Long story short, we began by converting a retired fabricating plant, because it had high amounts of power and cooling and it had a lot of industrial and secure features that lent itself to mission-critical construction. We leased it out in its entirety to a new social media company at the time, which has since consolidated their operations out of that building. We executed essentially the same plan again up in Oregon. Then, we acquired a property on the east coast in Ashburn, Virginia, which is the biggest data center market in the country. The other piece is the Infomart in Dallas, which is a landmark building that originally had nothing to do with telecom. It was designed and built by Trammel Crowe in the 80s as a place to showcase technology and merchandise. It's a beefy building from an infrastructural standpoint, and it became a telecommunications central office in the late 80s and later housed MAE-Central. Through the late 90s, colocation companies put their footprint there, establishing it as a carrier hotel without Ma Bell or some pre-regulatory decision. Now, it's a million and a half square feet and is about 60-70% data center, and our prediction is that number will continue to go up.
TR: So where on the wholesale/retail spectrum of data center services does Infomart fit?
JS: We are a full service wholesale data center. My view on retail versus wholesale is not how big they are in terms of the footprint, it's what level of service do you intervene at. I think the brightest line that clearly delineates which side of the fence you are on is whether you access your client's applications and data. If you provide services where you are actually part of their data management, then you have to staff differently, and compliance laws affect you differently. We are the wholesale data center, being high availability power, high availability cooling, and physical security, and we offer network as an amenity. We take a bit of a different tack on that than other wholesale folks in that we are not a cross-connect merchant. We provide connectivity, but we charge for the setup of a network and not recurring fees for cross-connects.
TR: We’ve seen Digital Realty buy Telx and enter the interconnection business. Do you feel any pull to make a similar move?
JS: Digital Realty had an issue in that Telx owned the Meet-Me Rooms in several of their largest facilities. It was really a strategic acquisition for them to gain control of their own ability to provide connectivity to their clients. We have never turned over the operations of our Meet-Me Room to a third party, so we don't have the same issue. Having said that, our clients are demanding more and more in terms of network solutions. 10 years ago, you would sign a lease for space and power only, and more or less abdicate the network to the tenant. They would call the carriers themselves. Over the years, clients have become interested in speed and convenience. We view it as an amenity we want to provide professionally and conveniently, but most people are choosing us because of our facilities. At Infomart Dallas, it is a bit different because that building is tremendously connected, and our product mix is a little different than it is in the rest of the country.
TR: How much does your approach differ at the Dallas Infomart?
JS: My view is that all data centers are the hub of a network or a spoke. The Infomart is a hub, and the reasons for being in the building are different from others. In a spoke facility like our Silicon Valley or Portland or Ashburn facilities, people pick those markets because the connectivity throughout them is already great. Every carrier in the world terminates in one or more buildings in every one of those markets. If you're an IT user in that market and you need to reach a specific carrier, it's in the market. In those facilities, we provide a Meet-Me Room, we enable the connectivity, we set up the cable plant, but we don't have sales staff trying to sell connectivity. It's not our role and it's not a profit source. In Infomart Dallas, people want to be there because it is the hub. The challenge there is that while it is one of the most connected buildings in the world, when we bought it there was no centralized Meet-Me Room. After we took over the building in 2014, one of our first goals was to put a master plan in place for continued development. All the easy wall penetrations had been made. We wanted to create order to figure out how to bring the next 20-30 MW into the property. Rather than alter our business model, we created our own Meet-Me Room, our own set of policies, and stayed true to our business model. Like in our other facilities, we are more concerned with rent than selling the network, but the access to network in Dallas is much more significant with 75+ carriers on-site.
TR: What drove the merger between Fortune Data Centers and the Dallas Infomart?
JS: First, we wanted to expand to a national footprint. And second, the fund that owned Fortune already owned the Infomart too, so a combination made sense. What we see happening in the data center world is national clients that want to be in the core markets because that's where their customers want them to be. Data centers are growing in every major market, but we're seeing very fast growth in several key markets. In the east it's Ashburn, in the west it's Silicon Valley. Why did the market choose them? We could debate it but the fact is that choice has occurred. My theory, however, is that today's server hugger is not a guy with a bad fitting t-shirt, bad haircut and sever in the office closet. Today's server hugger has more to do with proximity to other servers, CDNs, networks, and applications. And that's what drives the demand.
TR: Do you foresee expansion into additional markets?
JS: I like the markets we are in, and we are expanding in every one. We've got nine figures of construction going on right now. We've got hundreds of people working in Oregon, expanding that facility for LinkedIn. We've got close to a hundred working in Silicon Valley expanding for a client here, and we're about to embark on a similar project in Ashburn. We are also doing two things at the Infomart facility in Dallas: improving the total security of the building with a hardened perimeter, and doing capacity and redundancy upgrades for the electrical systems for both our own usage and for that of several tenants. There are other markets we might find attractive, but it would have to fit our core market thesis. I think there are big buyers of computing capacity that look at a map and say “where are the default pockets?”. Those are the markets we want to be in. We're not going to go to somewhere rural simply because it's super cheap. In the northwest, I like Portland more than Seattle, because Seattle's cost basis is closer to California's. I view New York / New Jersey as a donation market where you find large tenants don't want to stay. If you're trying to serve the east coast population, Ashburn is where you want to be. In the center of the country, you could make an argument between Chicago versus Dallas, but I like Dallas better because it has lower costs and it's easier to develop in.
TR: So you see the biggest opportunities in your existing markets?
JS: Yes, we just signed a lease with LinkedIn last year, and their three core markets in North America are Ashburn, Dallas, and Portland. We just signed a lease to a major cloud provider, and their three top markets are Ashburn, Dallas, and Silicon Valley. We just signed a lease with a music leading streaming media company, and they wanted their analytics here in Silicon Valley. I'd say we are a merchant of data center capacity. We're not Google or Facebook doing this for our own usage. If we're smart and good at what we do, we will develop product that people want to use in markets they want to be in. That's our goal.
TR: What’s your view of M&A in the data center sector today? Might Infomart participate further?
JS: There's a lot of M&A activity going on. I think trophy assets will sell for very high premiums right now because the capital markets are accommodating it. Debt is cheap, and there are a lot of equity investors that want to get into the market. If you look at all the acquisitions that have been done over the last two to three years, there are all these financial buyers with private equity money that are getting shut out. They bid for assets or companies and they usually lose because strategic buyers are squeezing them out because the benefits to consolidation are high. Some strategic buyers are trying to broaden their service set, others are trying to reach new markets. But I see Infomart growing organically. We had a nine-figure capital expansion last year and are doing the same again this year, and probably the same the year after that. Could we do more? Sure we could. But we're pretty busy right now as it is. The market is good.
TR: How do you differentiate yourself as a wholesale provider of space and power?
JS: Our operating record is flawless -- we haven't had an outage since the company's inception. We’ve never had a work injury, and we've done more than half a million hours of construction labor. And we think we're among the most energy-efficient out there, and we've pushed hard for having choice on our power contracts. We went to all renewable power in Portland last year and also have Direct Access power in Silicon Valley, offering us choice in our energy procurement. So in terms of efficiency, transparency, and track record I think there may be some as good as us but I don't think there's anyone who is better.
TR: What has been your approach to renewable power? What do you think of the recent paths taken by the likes of Equinix and Digital Realty?
JS: The power business is a highly regulated business. Unless you live in a state where they've opened up the markets for competition, you have very limited choices. What some others have announced is to fund a wind power plant, becoming the anchor tenant for development but they don't actually take the power from it. The take the power and sell the power. But the facilities they own are doing the same thing they were before, which is to buy power from the utility and whatever is in that utility's generating mix is what they get. It's just an offset, not unlike a tax credit. What we are doing, called Direct Access, is different. Direct Access is about having more choices. We go to the utility and find a way to exercise direct access or choice, and we get two utility bills. One is from the local utility that owns the wires to our facility. And then we bid out our power contract, specifying what we want. In Portland, we said we were going to burn so many megawatt-hours of power and we wanted it 98% carbon- free. The market contracted and bought power from the Bonneville Power Administration (PBA), which delivers hydro power to the grid and we pay them for it. So there's no offset, we actually are using BPA renewable power at Infomart Portland. We changed our relationship with the utility.
TR: What do you need to be able to replicate your success in switching to renewable energy in Portland and Silicon Valley in your other markets of Dallas and Ashburn?
JS: We went to Portland in part because there was Direct Access right in the utility's charter. In Silicon Valley it's a closed market, with most of the demand in the south bay. But one of the last things that Governor Schwarzenegger did before he left office was to pass a bill allowing a limited experiment with Direct Access. It was given out via a lottery, we prepared for it and were selected. Texas is already open. We inherited the building with a long term power contract, but we are now revisiting that as the contract comes up for renewal and we will do the same thing we have done in other markets: press for choice and use it to buy greener and cleaner power. With Ashburn, our intent is the same. My prediction going forward is that our clients are going to demand choice, and the utilities will have to find a way to accommodate that choice. Our mission at Infomart Data Centers is to enable the world's most sustainable IT operations, and Direct Access is just one way we are fulfilling this mission.
TR: Thank you for talking with Telecom Ramblings!