Market Analysis – 81111814 – Co location service

Market Analysis Brief: Co-location Service (UNSPSC 81111814)

Executive Summary

The global co-location market is projected to reach $73.5 billion in 2024, driven by enterprise hybrid cloud adoption and the intense power and cooling demands of AI workloads. The market is forecast to grow at a 13.8% 3-year compound annual growth rate (CAGR), demonstrating sustained relevance despite the public cloud's dominance. The primary opportunity lies in positioning co-location as the critical interconnection hub for hybrid and multi-cloud architectures, which are becoming the default enterprise IT strategy. The most significant threat remains the long-term migration of traditional enterprise workloads to hyperscale public cloud providers, bypassing co-location entirely.

Market Size & Growth

The global Total Addressable Market (TAM) for co-location services is robust, fueled by data growth, digitalization, and specialized infrastructure needs that cannot be met in-house or in the public cloud. Growth is particularly strong in the hyperscale and interconnection sub-segments. The three largest geographic markets are 1. North America, 2. Asia-Pacific (APAC), and 3. Europe, which together account for over 90% of global revenue. [Source - Synergy Research Group, Jan 2024]

Key Drivers & Constraints

1. Driver: Hybrid & Multi-Cloud Architecture. Enterprises are increasingly using co-location facilities as secure, low-latency "on-ramps" to connect private infrastructure with multiple public clouds (e.g., AWS, Azure, GCP), creating a resilient hybrid IT environment.
2. Driver: AI & High-Performance Computing (HPC). The proliferation of AI/ML workloads requires power densities (30-100+ kW per rack) and liquid cooling solutions that far exceed the capabilities of traditional enterprise data centers, driving demand for specialized co-location providers.
3. Driver: Data Sovereignty & Edge Computing. National data residency laws and the need for low-latency processing for applications like IoT and content delivery are fueling demand for a distributed footprint of smaller, regional co-location sites.
4. Constraint: Hyperscale Cloud Competition. The continued shift of general-purpose enterprise applications to Infrastructure-as-a-Service (IaaS) and Software-as-a-Service (SaaS) reduces the addressable market for traditional enterprise co-location.
5. Constraint: Power Availability & Cost. Securing utility power at scale has become a primary bottleneck for new data center construction in key markets (e.g., Northern Virginia, Silicon Valley), leading to multi-year delays and significant price pressure on electricity.
6. Constraint: Supply Chain & Construction Delays. Long lead times for critical infrastructure components like switchgear, generators, and cooling systems (12-24 months) are slowing the delivery of new capacity and increasing build costs.

Competitive Landscape

Barriers to entry are High, defined by extreme capital intensity (upwards of $1B for a new campus), access to land with scalable power, and the time required to build a dense interconnection ecosystem.

⮕ Tier 1 Leaders * Equinix: The global leader in retail and interconnection-focused co-location, differentiated by its Platform Equinix® fabric that links thousands of businesses, networks, and cloud providers. * Digital Realty: A dominant player in wholesale and hyperscale co-location, differentiated by its massive global footprint and PlatformDIGITAL® offering for large-scale deployments. * NTT Global Data Centers: A major global provider with a strong presence in APAC and Europe, differentiated by its integration of co-location with extensive network and IT services.

⮕ Emerging/Niche Players * QTS Realty Trust (Blackstone): Focuses on hyperscale, enterprise, and government sectors with a strong commitment to sustainably powered data centers. * CyrusOne: Strong focus on the enterprise and hyperscale markets in North America and Europe, known for its operational transparency and flexible solutions. * Iron Mountain: Leverages its brand reputation in physical security and compliance to target highly regulated industries with a growing data center portfolio.

Pricing Mechanics

Co-location pricing is a composite of three primary components: space, power, and connectivity. Space is typically billed per cabinet, cage, or private suite on a monthly recurring basis. Power is the most complex and significant cost, billed either as a fixed-cost per circuit (e.g., a 30-amp 208V circuit) or on a metered basis (per kWh consumed). Metered power is becoming the standard as it encourages efficiency. Pricing models almost always include a pass-through for the facility's Power Usage Effectiveness (PUE), a measure of energy efficiency.

Connectivity is a high-margin, recurring revenue stream for providers, consisting of monthly fees for physical "cross-connects" (fiber or copper) that link a customer's equipment to carriers, cloud providers, or other tenants within the data center. Additional costs include "remote hands" services for on-site technical support and IP bandwidth services.

The three most volatile cost elements are: 1. Electricity: Industrial electricity prices have seen increases of 10-30% in major markets over the last 24 months. [Source - U.S. Energy Information Administration, 2024] 2. Skilled Labor: Wages for qualified data center technicians and engineers have risen an est. 7-10% annually due to talent shortages. 3. Industrial Metals (Copper/Steel): Prices for raw materials used in cabling and construction remain elevated, impacting both cross-connect fees and new build costs.

Recent Trends & Innovation

• Liquid Cooling Mainstreaming (2023-2024): To support extreme-density AI hardware, leading providers are now offering direct-to-chip and immersion cooling solutions as a standard service, moving beyond pilot programs.
• Private Equity & M&A Activity (Nov 2023): The market continues to consolidate, highlighted by Brookfield Infrastructure Partners' acquisition of Cyxtera's assets. This underscores the trend of major infrastructure funds acquiring data center platforms for stable, long-term returns.
• Sustainability as a Differentiator (2023-2024): Major providers are aggressively signing large-scale Power Purchase Agreements (PPAs) to procure renewable energy, responding to customer ESG mandates and using it as a key competitive differentiator in RFPs.

Supplier Landscape

Regional Focus: North Carolina (USA)

North Carolina has emerged as a significant secondary data center market, benefiting from a strong business climate and proximity to the primary hub of Northern Virginia. Demand is robust, driven by Charlotte's financial services sector and the Research Triangle Park's (RTP) technology and life sciences ecosystem. The state offers attractive tax incentives for data center investment, and power costs from Duke Energy are historically competitive. However, like other high-growth markets, securing large blocks of power (>100MW) for new hyperscale builds is becoming a significant challenge, potentially constraining future large-scale supply growth. The market features a healthy mix of providers, including Digital Realty, QTS, and Flexential, ensuring competitive tension for enterprise-scale deployments.

Risk Outlook

Actionable Sourcing Recommendations

1. Embrace Interconnection for Hybrid Cloud. Prioritize providers with mature, low-latency interconnection fabrics (e.g., Equinix Fabric, PlatformDIGITAL®). In negotiations, mandate a flexible 3-year term with a "ramp" clause for cross-connects and cloud on-ramps. This supports a phased cloud strategy while capping core connectivity costs, targeting a 15-20% reduction in network egress fees versus direct public cloud connections.

2. Future-Proof for AI & ESG. Issue an RFI specifically for high-density deployments (>30kW per rack) to qualify providers with commercially available liquid cooling and transparent sustainability roadmaps. Secure capacity in facilities with contractually committed power availability for the next 5+ years. This mitigates the risk of being unable to support future AI workloads and de-risks power cost volatility through potential PPA pass-throughs.