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Computing power being gobbled up at data centres

Contemplating the outsourcing of your data centre? It might be wise to do it soon, before vendors with available space become hard to find.

Demand for data capacity is increasing more than twice as fast as supply worldwide. According to a November report from Tier 1 Research, a division of the technology-industry research firm 451 Group, demand for data-centre space rose 14 per cent over the previous year, while supply increased only 6 per cent. This has further tightened an already shrinking supply.

"There's a relatively large amount of data-centre space out there," says Dan Golding, research director at Tier 1. Much was built from 1998 to 2000, he says, but from the dot-com bust of 2001-2003 onward, little new space has been built, and just as new construction started to recover it "came to a screeching halt with the credit crunch."

Commercial credit is generally hard to get, he says, and particularly so for data centre construction. That's because many banks lost money when the dot-com boom when bust and the speculators failed.

Meanwhile, a slowing economy tends to result in an increased demand for outsourced data handling, as businesses look for ways to cut costs.

"If you look right across North America, the data centres that are built are filling up," says Robert Offley, president and chief executive officer of CentriLogic Inc., a Rochester, N.Y., outsourcing contractor with operations in the United States and Canada. "And as they fill up, the price is going up."

The costs at data-centre outsourcing contractors have been on the rise since 2005, says Mr. Golding, with prices soaring 10 per cent in both 2006 and 2007 before easing off last year. (Prices rose partly because low-cost contracts signed during the bust were coming up for renewal.)

The rate of increase will probably approach 10 per cent again by the end of this year, he says, and could go as high as 15 per cent in 2010.

The supply of space is not as constrained in Canada as in some parts of the U.S., says Phil Shih, a mass-market hosting analyst with Tier 1 in Toronto. However, space in Toronto and Calgary is beginning to tighten, with more than 70 per cent of space utilized.

"There used to be an oversupply in the post-dot-com era," says Osama Arafat, chief executive officer of outsourcing contractor Q9 Networks Inc. in Toronto. "All the excess capacity has been absorbed in the last seven or eight years."

Mr. Arafat says there is no oversupply in the Canadian market now, which is why Q9 is building new capacity. CentriLogic has also recently opened new facilities in Mississauga.

But while some established companies have the resources for new construction, others do not.

"We pass up opportunities every day right now," says George Kerns, president and chief executive of Toronto outsourcing contractor Fusepoint Managed Services Inc.

As outsourcing costs rise, it will become less appetizing, experts say.

With less space available, "it will put pressure on the rates for outsourcing space, which could erode some of the benefits of outsourcing," says Steve Power, partner in business advisory services at consulting firm Ernst & Young in Toronto.