Data centres, hyperscalers and the cloud

Data centres, hyperscalers and the cloud

The data centre market is significant and growing. Statistics show that global data usage has doubled over the last five years, with industry commentators predicting that data centres may use up to 10% of the world’s electricity supply by 2030. With the data centre services market valued at $48.9 billion in 2020, and forecast to increase to $105.6 billion in 2026, many market analysts were surprised by the respected veteran investor Jim Chanos’ decision in the summer of 2022 to take short positions in US-listed data centre groups.

The relationship between data centres and the cloud

It is perhaps helpful to stress that the markets for data centre services and cloud technology are not mutually exclusive. Cloud operators still need to locate their servers in a data centre, whether that be in-house or remote. Anthony Carter, a data centre markets commentator, highlights this in relation to Microsoft Office 365: “The application and all of its data are hosted on servers all around the world. Those servers are located in data centres.” The real question therefore is whether cloud technology operators are going to enter and increase their investment in building their own data centres to exclusively house servers for their technology.

Is the rise of cloud technology a threat to the traditional data centre?

Mr Chanos’ justification for ‘shorting’ the industry was that he believes the increasing use of the cloud, driven by the market leaders Microsoft, Amazon and Google poses a risk to the future of traditional data centres. Proponents of this view argue that these cloud market leaders, increasingly known as ‘hyperscalers’, are inevitably going to increase investment in building their own data centres to house their cloud technology servers. They believe that hyperscalers will do this because they have the financial means to do so, and they can benefit from building a bespoke data centre tailor-made to meet their precise requirements rather than relying on a more generalised outsourced solution. There is also a concern that traditional data centres may struggle to keep up with the technological advances required by the rapidly expanding and developing cloud technology.

Differentiation and networking capability

The advantages and benefits that existing data centres enjoy should not be underestimated. They often have pre-existing strategic locations (proximity to the end user and the large internet switches still has an impact on latency), and crucially profit from the benefits offered by networking capability. This networking capability can be appreciated when considering that many business customers use multiple different IT applications and services from Gmail to OneNote, which are hosted on different clouds. By co-locating these servers in one physical location (which independent (non-hyperscaler) data centres provide) it allows for the seamless transfer of data between applications.

Assuming that the hyperscalers will inevitably expand their individual data centres at the expense of existing lease agreements may also be premature. Just because they have the financial power and technical means to build data centres it does not follow that this is central to their business plan. Building and operating data centres is an expensive business and one which is increasingly coming under the scrutiny of the ESG lens and the accompanying risk of poor publicity. With the seemingly inevitable continued growth of the hyperscalers’ requirements to use data centres to meet the processing and storage needs of cloud technology, it is likely that they will continue to use trusted partners that continue to run and maintain independent data centres to meet these demands in conjunction with building their own bespoke centres.

How we can help

What is clear is that the data centre market will continue to evolve rapidly over the coming years, seeking to address the continued increase in global data usage. This will inevitability present legal challenges to businesses, for example in terms of outsourcing requirements, increased M&A activity if the hyperscalers seek to increase their in-house offering or compliance with ESG requirements. Simmons & Simmons has deep industry expertise and credibility working with data centres and cloud technology providers and customers. If you have any queries or legal needs in this field, then our team are on hand to discuss your specific queries and would be delighted to assist.