Supply and Demand in the Colo Sector

Paolo over at Nortia Research has a nice article today on trends in the data center and colocation business, I recommend a read. Basically, he makes the case that the credit crisis is drying up the funds needed for expansion, but that expansion is driven by real demand.  The economy may be slowing the growth of that demand, but it quite clearly isn’t stopping it.

To me, this is a self-correcting problem … eventually. A constricted supply with continuing demand growth means simply that prices are going to have to go up. And as prices go up, so will cashflow in the sector. The better the cashflow is, the easier it will be to raise money from the banks, who of course prefer to lend money to those who don’t need it.  But how good things have to be before builders of datacenters can raise money is an open question right now, and since we don’t know how high that bar is it is really hard to say what colocation pricing is going to do.

Colocation was part of the dot com bubble and it suffered for it for a long time, too much money went into too much space was built out and it took years of horrifying price compression before capacity came back into balance. In a way, one could imagine that a prolonged credit crisis could create the opposite effect, a buildup of pressure that must released by skyrocketing prices.

Or perhaps not, perhaps it could lead to greater miniaturization and power efficiency? Well, such technological advances require capital too, R&D costs money. For now though, colocation pricing has been on the rise for a couple years already and it doesn’t look like it’s going to stop.

If you haven't already, please take our Reader Survey! Just 3 questions to help us better understand who is reading Telecom Ramblings so we can serve you better!

Categories: Datacenter · Financials