Data centers heading into transitional growth cycle, says analyst

The data center industry is evolving again, as traditional players like Equinix continue to scale, while telcos with data center assets like CenturyLink (NYSE: CTL) are mulling the future of their business.

A new Wells Fargo report makes a case that the data center industry overall is in the process of what it says is a transitional stage where more enterprises are looking to outsource more of their IT infrastructure to a third-party so they can focus on their core competencies.

As a result of this trend, data center providers are increasing their scale in terms of the bandwidth they can support and expanding to new locations.

"Data center providers can enable enterprises to access cheaper power and floor space with lower upfront costs and more predictable ongoing expenses," said Jennifer Fritzsche, senior analyst for Wells Fargo, in a research note. "Many facilities offer dense interconnection hubs where customers can exchange data and connect to the Internet. Ultimately, we believe an increasing proportion of enterprises will choose to outsource IT infrastructure to these environments."

Wells Fargo says that the ongoing adoption of cloud services from companies such as Amazon (NASDAQ: AMZN) AWS and Microsoft (NASDAQ: MSFT) Azure means that more enterprises will outsource their IT infrastructure functions to third-parties.

Today, only 20 percent of the enterprise segment's server deployments are outsourced today.

Fritzsche said that data center providers offer a number of benefits for enterprises, including the ability to "provision floor space more quickly and cost-efficiently, offer interconnection with other customers (including public/private cloud operators), and offer multiple transport options for bandwidth."

What's more, cloud providers can also benefit from the growth in data centers, particularly as they look to enhance their reach.

"The cloud companies themselves, are also outsourcing more IT to third-party data centers in order to scale more quickly and reach a broader array of customers," Fritzsche said.

Interestingly, the data center industry itself is in the midst of rapid change.

While established providers like Equinix continue to scale, a number of telcos like AT&T (NYSE: T), CenturyLink and Verizon (NYSE: VZ) are considering what their future in the data center business will be.

Rumors emerged in 2015 that AT&T and Verizon were looking to sell their data center businesses, but no deals have been announced yet. In January, a report emerged in Reuters that Verizon has devised a plan to sell its data center business in a potential $2.5 billion deal.

Meanwhile, CenturyLink told investors during its third quarter earnings call the same thing: that it was looking at various opportunities for its data center and colocation business operations and considering a number of options for this segment. CenturyLink also created a separate data center/colocation organization, including a separate management team.

Later in February, Glen Post, CEO and president, told investors during its fourth quarter earnings call that multiple parties are interested in its data center business.

Related articles:
CenturyLink considers wholesale model for data center business
Report: Verizon may sell data centers for $2.5B
CenturyLink says multiple parties are interested in its data center business