Fritzsche’s Forum

Are the Data Centers Growing Increasingly Edgy?

October 18, 2021


The edge continues to gain momentum and the industry giants are paying attention. Just last week (on 10/14) we saw Digital Realty (DLR) – the staid “REIT-y” data center company – continue to move on this effort with a strategic investment in AtlasEdge. AtlasEdge came together through a partnership with Liberty Global and DigitalBridge. This is not DLR’s first move into the Edge space. In 2020, DLR teamed up with Vapor IO’s software-defined Kinetic Edge in some of its US facilities (including Atlanta, Chicago and Dallas). Equinix, DigitalBridge, and Switch all have their own version of edge offerings.

This should not come as a surprise as the data center moves are driven by the needs of their largest customers. And for the largest customers – namely the cloud players – the Edge is much more than just a white board concept.

Last week, I had the opportunity to be a guest speaker for a class at NYU to go through the general concept of what a data center is. During my talk, a student asked me what I thought of Microsoft’s underwater data center. I was quite confused, but sure enough I Googled it and it does indeed exist. (It is true – “teachers” often learn from their students.) If you look at the picture of this online, you will see that this ‘underwater data center’ is really more of a small tubular type structure than a true data center, and in reality, is yet another edge point of consumption – albeit two miles deep!

The “smart money” behind some of these edge concepts don’t question the need for the edge; what I have found is they question how to make money from the concept. Perhaps they need to look a bit further down the lines of the income statement to find the real value of the edge – costs savings vs. revenue enhancements.

A 2015 McKinsey & Company study found that an offshore oil rig generated data from 30,000 sensors — but less than one percent of that data was used to make decisions. The question becomes now – many years later – has that changed? It seems to me companies have a tremendous opportunity to use such data to make much smarter decisions from a cost side.

There have been several case studies that show edge deployment can result in tangible cost savings for enterprises deploying such initiatives. One recent case study put out by IBM showed its edge solutions for a manufacturing client resulted in a 5x increase in inspection efficiency, a 20 percent reduction in false-positive defect detections, and a 20 percent savings on software maintenance.

For the cloud players who support these enterprises, such statistics will make any CFO sit up and take notice. Given the fact that cloud companies continue to be the critical and growing customer for the data center companies (note: cloud accounts for 28 percent of DLR’s revenue and 7 of EQIX’s top 10 customers), the edge cannot be ignored. But we all know that a heavy lift is needed on the infrastructure side to extract all the benefits of the edge. It is a similar ‘chicken and egg’ scenario as a 5G discussion.

However, although an edge opportunity in isolation is more of a cost savings driver for the end customer, how data centers position this edge to best support their cloud customers could be an important needle mover for their own top-line growth. If cloud companies are able to pitch the ‘realness’ of these cost savings to customers, they (cloud players) will need help from their 3rd party data center partners.

I remember the professor of my Entrepreneurship 101 class in business school started one class with this saying on the chalkboard (yes, it was still really a chalk board!): “Always remember – you can mine for gold or you can sell pickaxes.”

I thought of that quote when thinking about the edge value chain. It seems to me the edge play may be the new pickaxes for the data centers to pick up and run with in a much bigger way right now. Let their customers go hunting for the gold at the end of the rainbow. It is those customers’ customers that seem to finally be waking up to the benefits that the edge can bring.

Jennifer  is Managing Director at Greenhill & Company.  She focuses on the North American Communications Services & Infrastructure spaces.   Prior to this role, Jennifer was as Managing Director and Senior Equity Analyst at Wells Fargo Securities for 25 years where she focused on the Telecommunication Services, Cable, Data Center and Tower sectors.  During her tenure at Wells Fargo, Jennifer received numerous awards including top rankings from Institutional Investor in the Communications Infrastructure space for each of the last four years (2017 – 2020).

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