Data Center Economics: Build vs. Buy

Data Center Economics: Build vs. Buy

Rich Miller for Data Center Knowledge

Does it make more sense to build your own data center, use a colocation center to house your gear, or lease turn-key space from a wholesale data center provider? The size of a requirement has historically been a key decision point in sorting out the economics of data center expansion. But capital, control and speed to market are also important considerations in determining the best approach, according to panelists at the Tier 1 Datacenter Transformation Summit last week in Reston, Va.

A significant number of enterprise companies still prefer to build their own data centers, usually out of a desire to control all aspects of their operation. Security is often a guiding principle for companies that build their own facilities. Many financial services firms build stand-alone data centers to ensure that their critical IT assets are not sharing space with other companies.

“We believe it’s economical for us to build our own data centers,” said Jeff Lowenberg of The Planet, a hosting provider with major operations in Houston and Dallas. “It’s also an issue of control. Nobody has our best interests at heart more than we do.”

Wholesale Benefits from Focus on Capital

The wholesale model, in which a developer leases finished plug-n-play data center space, is increasingly attractive to companies seeking 1 megawatt or more of data center capacity. One company that has made extensive use of wholesale space is Horizon Data Center Solutions of Dallas, which has expanded quickly by leasing space from Digital Realty Trust and Power Loft.

“It was really a CapEx issue and time-to-market issue,” said Lance Smith, the CEO of Horizon. “We are also concerned with the obsolescence of certain technologies in the data center sector.”

Wholesale space allows providers to avoid large up-front investments in data center construction, which typically can cost $1,000 to $1,500 for each square foot of finished space. With many companies seeking to conserve cash amid tight credit conditions, the wholesale model has gained favor.

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One Response to “Data Center Economics: Build vs. Buy”
  1. The new lease accounting standards that are forthcoming soon from IASB and FASB are going to affect this own vs buy decision … at least for those companies that base such decisions largely on financial statement impact. Actually, countervailing currents will result from the new standards, the main feature of which is that all leases will go on the balance sheet. On one hand, owning will become more acceptable to those companies who have avoided owning to avoid putting assets on the balance sheet. Now leases will also be on the balance sheet. Moreover, the P&L impact of owning will often be more attractive in the early years than will be the impact of leasing. However, in the special case of data centers, to the extent a company is buying a license and paying for services rather than leasing space, it might be possible to avoid putting such obligations on the balance sheet, thus making leasing more attractive to some companies. If so, this will probably be the low cost solution, in terms of P&L impact.

    by Bob Cook
    on 28. Jun, 2010

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