What lies ahead for the data center industry in 2021? At Data Center Frontier our eyes are on the horizon, and we’re constantly tracking the trends that matter. Our crystal ball did pretty well last year, so it’s time to look ahead at what’s in store for 2021.
We’ve identified eight themes that will shape the data center business this year. We’ll be writing in more depth about many of these trends, but this list provides a high-level view of the topics that we believe will be most relevant in 2021.
1. The Enterprise Adapts to a Changed IT Landscape
Data center infrastructure has been the driving force in the rise of the digital economy. That was never more apparent than in 2020, when cloud technology enabled society to retool to survive the COVID-19 pandemic. This trend will continue in 2021, as the world slowly defines the contours of the “next normal” in its battle with COVID-19. It is an enormous challenge, and an enormous opportunity, and digital infrastructure will be central to this transition.
The unpredictable nature of the pandemic is clear in the emergence of a fast-spreading new variant of COVID-19, which has complicated strategies for vaccination and recovery. The new reality is that flexibility, adaptability and resiliency are the business attributes that will matter most. Many organizations are not yet wired for this.
The pandemic-driven IT modernization is a continuation of the enterprise shift from on-premises legacy IT to more agile cloud technologies in third-party data centers. This has been a long, gradual process, but the pandemic has provided a “seismic jolt” to these efforts, according to IDC. In most cases, the answer will be more cloud computing.
“Cloud in all its permutations will play ever greater, and even dominant, roles across the IT industry for the foreseeable future,” said Richard Villars, group vice president, Worldwide Research at IDC. “By the end of 2021, based on lessons learned in the pandemic, most enterprises will put a mechanism in place to accelerate their shift to cloud-centric digital infrastructure and application services twice as fast as before the pandemic.”
In 2020, this translated into massive demand for hyperscale capacity, but a more mixed picture for enterprise IT investment, as some companies spent cautiously in pandemic mode. Postponing IT transformation projects won’t be an option in 2021, as companies adjust their IT roadmaps to compete in a shifting business landscape.
The pandemic has placed a premium on flexibility, which will accelerate the ongoing shift to new architectures and software-defined, programmable infrastructures. Organizations that have been studying these opportunities will need to act or risk being left behind.
“2021 will bring an accelerated adoption of cloud-native technologies across virtually every layer of the infrastructure stack, as well as for digital infrastructure orchestration from the edge to multicloud,” said Justin Dustzadeh, Chief Technology Officer at Equinix. “Anything that can be automated should be automated through software. Digital growth and acceleration are here to stay, and with that realization comes the need for digital leaders to embrace the technologies and trends that will give their organizations a clear advantage.”
All of this adds up to more demand for data center and cloud infrastructure – bigger, faster, available everywhere and ready to scale.
2. Sustainability Takes Center Stage
When it comes to climate change, it is time for the data center sector to lead. The massive energy footprint of cloud computing enables the data center industry to drive a global shift to renewably-powered business. Customers and stakeholders are demanding accountability on climate impact, creating a compelling business incentive to embrace sustainability.
The urgent need for climate action is writ large in headlines about devastating wildfires on the West Coast, and powerful hurricanes along the Gulf Coast. These disasters have been a tipping point in public awareness, driving home the fact that a changed climate is not a future threat, but a current reality. The data center industry is in a unique position to accelerate the adoption of sustainable practices and reduce the damage to our changing climate.
“We are finding new ways to do things that are better for the business, better for the environment, and better for the community,” said Kevin Hagen, Director of Corporate Responsibility at Iron Mountain. “It isn’t a trade-off. You don’t have to choose between doing the right thing, and doing the green or socially responsible thing.”
Innovation in energy efficiency and renewable adoption has been driven by the industry’s largest customers – Microsoft, Google, Facebook and Amazon Web Services – with the largest multi-tenant developers acting as “fast followers.” But sustainability is now a front-of-mind concern for enterprise customers, which is raising the bar for the entire industry.
“The time of easy wins and greenwashing is ending,” writes the Uptime Institute. “Regulators, watchdogs, customers and others will increasingly expect operators of digital infrastructure to provide hard and detailed evidence of carbon reductions, water savings and significant power savings — all while maintaining, if not improving, resiliency. For those organizations that lack the will to reduce their digital infrastructure carbon footprints, or that are lagging, there will be nowhere to hide – and there will be fewer opportunities to avoid close and meaningful scrutiny.”
For a deeper dive into sustainability, see the new DCF special report on green data centers.
3. Creating Data Center Capacity at Internet Speed
Bigger. Faster. More Efficient. These are the new rules of the road for deploying data center capacity, and the industry is meeting this challenge with deep reservoirs of innovation and financial strength.
The industrialization of cloud capacity is hardly new, but the combination of the hyperscale boom and the pandemic are showcasing these capabilities as never before. The data center industry has matured rapidly over the past decade, and stands ready to meet the challenges of the accelerating transition to a digital world.
Experience and ingenuity are a powerful combination, especially when backed by the resources of huge global investors. We’re seeing an explosion of well-funded global platforms backed by operators with deep expertise in real estate and supply chains. Meanwhile, hyperscale customers are innovating inside the data hall, optimizing almost every aspect of data center operations between the grid and the processor.
The end result is an industry that can deploy new data centers in new places, extending the digital transformation wherever the business requires. This is incredibly important, as demonstrated by the COVID-19 pandemic. The solutions to the world’s largest challenges are digital, and require IT capacity. The data center industry stands ready to deliver.
This matters as the location of IT infrastructure continues to evolve. Structure Research estimates that on-premise data centers still represent 61 percent of IT infrastructure, but predicts a rapid transition over the next five years, with that on-premises footprint shrinking slightly while cloud and colocation providers see massive growth. By 2025, hyperscale cloud will represent 49 percent of the market, compared to 28 percent for on-premises infrastructure.
A growing percentage of that hyperscale capacity will be built by data center development specialists, rather than the cloud operators, according to Credit Suisse. Analyst Sami Badri says that the accelerating demand during the pandemic will prompt hyperscale customers to lease more capacity rather than build it themselves.
The opportunity is enormous. Digital Realty estimates that by 2024, Global 2000 Enterprises across 53 metros will create data at a rate of 1.4 million gigabytes per second and will require nearly 20,000 petabytes of additional data storage annually.
4. Automation and Robotics Lead Pandemic Tech Solutions
The rapid embrace of data center automation is about to enter a new phase, in which automation and robotics play a larger role in facility management. This is a trend we’ve been tracking for years, including the use of robots to install servers in racks, swap out failed servers, manage disk storage and interconnection, and site security.
The pandemic has accelerated the need to make systems less reliant on human intervention. Expect to see these initiatives abound as data center operators prioritize the health of their operations teams and pursue contactless maintenance.
Hyperscale operators are already on the job. Facebook has created a Site Engineering Robotics team to “design and develop robotics solutions to automate and scale Facebook’s data center infrastructure operations.” Recent job listings for the team describe systems that will incorporate motors and actuators, cameras and sensors, compute packages and custom electronics. “The build scale ranges from in-house prototypes to low volume manufacturing (100s) with contract manufacturers,” the listings say.
But this trend will go beyond the hyperscale sector. A recent Uptime Institute survey found that 73% of data center managers expect to increase their use of automation as a result of the pandemic. A third of them expect that hiring challenges will translate into smaller operations teams, even as the volume of servers continues to climb. The result, according to Uptime, will be “smarter, darker data centers.”
“Following a scramble to effectively staff data centers during a pandemic, many wary managers are beginning to see remote monitoring and automation systems in a more positive light, including those driven by AI,” write Uptime analysts Andy Lawrence and Rhonda Ascierto. “An adoption cycle that has been slow and cautious will accelerate.”
Edge computing has already brought new levels of sophistication to software automation in data centers, as seen in remote unmanned facilities operated by EdgeConneX. Similar software automation platforms figure into the business plans for Vapor IO and other edge data center startups.
5. DealFront: The Year of Major Data Center M&A
This could be a big year for data center mergers and acquisitions. The M&A scene has been active, with most of the major recent deals focused on global players adding capacity in new markets, especially Canada and Europe. Over the past two years we’ve seen new data center platforms backed by global investment giants, who may seek to gain scale through acquisitions.
Among the private players, potential buyers might include Global Compute (backed by Goldman Sachs), Global Technical Realty (KKR) and the GI Data Infrastructure Fund (GI Partners), along with Evoque (Brookfield) and EdgeConneX (EQT Infrastructure). Infrastructure fund Macquarie (Aligned, Netrality) and Colony Capital (DataBank, Vantage) have also been busy on the deal front. On the public side, Digital Realty and Equinix have each been active acquirers, and are not afraid to make deals to maintain their leadership positions and push into new markets or services.
Can all these platforms succeed through organic growth? It’s far more likely that we’ll see active M&A in 2021, including some larger transactions. Recent deals have fetched attractive valuations for sellers, but there are many buyers with deep pockets and big ambitions. Don’t be surprised to see deals that span different types of digital infrastructure (data centers, towers, fiber, wireless) or to a bold market entry from outside the current data center sector.
6. Edge Computing: The Whales Jump Into the Pool
As edge computing takes shape, we are approaching the brink of a new phase for global Internet infrastructure. As we’ve often stated, at Data Center Frontier we believe edge computing will play out over many years, boosted by the gradual adoption of technologies with long deployment horizons. It will consist of many layers (“edge, edgier and edgiest”) with opportunities in regional data hubs, cities, telecom towers and on devices.
This won’t be the “Big Bang” year for edge computing – that’s probably 2022. But 2021 will be a year in which edge aspirants establish beachheads to gain a strategic foothold, including several of the largest players in digital infrastructure. Amazon Web Services (AWS) and American Tower are shifting into deployment mode, and possess the resources to make a huge impact on edge computing and how it evolves.
Last month AWS launched three new Local Zones in Boston, Houston and Miami to accompany its first two deployments in Los Angeles. A Local Zone is an edge node offering easy access to Amazon’s cloud for low-latency applications. In addition to the three new cities, AWS said it would open 12 Local Zones in 2021, including zones in New York, Chicago and Atlanta. AWS Chief Evangelist Jeff Barr says the 2021 expansion “provide access with single-digit millisecond latency to the vast majority of users in the Continental United States.” AWS is also partnering with telecom companies in the U.S. and South Korea on 5G deployments using its AWS Wavelength offering.
Telecom tower titan American Tower has made small inroads into edge with its purchase of ColoAtl and deployment of six edge modules at its tower sites. But this is the prelude to a much larger edge play, as Chief Technology Officer Ed Knapp outlined at last month’s BCG and New Street Research conference on 5G wireless.
As AWS and American Tower get busy, it will generate opportunities and responses from other players in the emerging cloud ecosystem. This will mean partnerships, as AWS leases space in colocation centers to house its Local Zones, and American Tower works with modular data center specialist like EdgePresence to deploy capacity. It may also prompt investment in new sites and technologies by early players in edge, who will probably not want to play from behind in competing with these behemoths.
And yes, there will be M&A in the edge sector. DataBank has already been an active acquirer, and seems unlikely to rest on its laurels. Equinix has a clear interest in edge, and since it’s not building its own sites, appears to be waiting for the right acquisition opportunity to emerge. Consolidation opportunities abound.
7. Energy Storage Enables More Renewables
Utility-scale energy storage has long been the missing link in the data center industry’s effort to power the cloud with renewable energy. In 2020 both Switch and Google announced projects to begin supporting their data centers with large lithium-ion batteries. These early adopters are forging an important path, and we expect energy storage to quickly become an important tool for hyperscale operators. This process will begin in earnest in 2021.
Energy storage enables large users like data centers to overcome the intermittent generation patterns of leading renewable sources. Solar panels only generate power when the sun is shining, and wind turbines are idle in calm weather.
Switch will use Tesla Megapacks to create more than 800 megawatt hours (MWhs) of energy storage capacity to support the use solar power for its massive data center campuses in Las Vegas and Reno. Meanwhile, Google will use large batteries to replace the diesel generators at one of its data centers in Belgium.
This trend is enabled by the maturity of large-battery technology, as well as the price of lithium-ion batteries, which has declined by 80 percent over the past five years.
“Batteries can help balance other kinds of variability on power grids, allowing for more cost-effective and efficient operations,” said Joe Kava, Vice President for Data Centers at Google. “We’ll strive to make our project a model for how data centers can become anchors for carbon-free electric grids.”
8. Sustainable Finance Boosts Green Data Centers
Data center customers aren’t the only stakeholders that are focused on sustainability. Investors also will be part of the green energy revolution, as they seek to align their portfolios with climate resilience. This is creating a growth opportunity in sustainable finance that prioritizes ESG criteria (environmental, social and governance) in selecting targets for lending and funding.
“ESG has been around for a while, and it is beginning to permeate the financial institutions and the way they think,” said Andrew Schaap, the CEO of Aligned Energy, which just lined up a $1 billion sustainability-linked loan (SLL). “Investors and financial institutions are also being held accountable for their sustainability practices. You’ll start seeing it more. The banks are clamoring to be involved in these.”
SLLs belong to a family of sustainable debt that also includes “green loans” in which the borrowing will directly fund a sustainable project. Sustainability-linked debt instruments like the Aligned loan are not project-specific, but look to ensure a company’s overall ESG performance through sustainable performance targets that reduce the borrowing cost.
Equinix and Digital Realty have each raised funds using green bonds, and you can expect others to follow suit as the data center industry looks at new ways to add renewable energy, and investors seek to build greener portfolios.
“Infrastructure funds are clearly focused on ESG and sustainability,” said Pim Rothweiler, head of TMT (Tech, Media, Telco) at ING Capital, an early leader in sustainable finance.
“Sustainable business is good business,” said Dan Shurey, Vice President of Sustainable Finance at ING. “I think that’s become pretty well recognized across sectors. It’s no longer a nice to have it’s a need to have.”
What Else We’re Watching
Here are a few other trends that were contenders for the list, and we’ll be watching closely in 2021:
Waste Heat Recycling: This tops the list of “trends we’d love to see.” Using server waste heat in district heating is the ultimate virtuous cycle, particularly when combined with renewable energy. This is a trend in Europe, but has yet to gain traction in the U.S. There are some cool designs to use waste heat recycling in edge computing scenarios, like Blockheating, which deploys servers in modular data centers next to greenhouses. These initiatives can help data centers integrate with their communities.
Software-Defined Power: Another sustainable edge initiative is EDJX, which is implementing software-defined power technology from Virtual Power Systems, which uses a combination of software and distributed batteries to conduct peak shaving, using the batteries to store power and allocate it to the system when needed, creating a more elastic system for distributing power. This is a technology to watch.