Data Center Journal

VOLUME 44 | JUNE 2016

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THE DATA CENTER JOURNAL | 11 its decision, and their associated monetary value. In the example above, the company has gained a shell facility that it believes, on the basis of its current analysis, will satisfy both its existing and future data center requirements. In a sense, the deci- sion to optimize costs through building at scale is the equivalent of the contestant that goes "all in" in a poker game. But the "inexpensive" (compared with the fit out of the data center) cost of $100–$300 per square foot is still real money ($20 million to $100 million, depending on the size and hardening of the building). e building, and the land it sits on, is now committed to sole use for the purpose of housing the company's data center. Now that we have established what the business has gained through its deci- sion to build out the data center shell up front, we need to examine what the com- pany has "lost." In making the building decision, the business has chosen to forgo any other usage alternatives. By building the entire shell first, it has lost any future value of an appreciating asset—the land used for the facility. is land cannot be used to support any other corporate endeavors—offices, for example—and it cannot be sold for its appreciated value. While possibly unforeseeable, this deci- sion can become doubly problematic if the site never reaches capacity and some usable portion of the building/land is permanently rendered useless. Suddenly, the economy of scale is never realized, so the initial cost per kW is the end-point cost per kW. For example, let's assume a $3 million piece of land and $17 million to build a 125,000-square-foot building that supports six pods at 1,100 kW each. At $9,000 per kW for the first data center, that's an all-in of $30 million for 1,100 kW, or over $27,000 per kW. It's not until we build all six pods that we get to the "economy of scale" that produces an all-in of $12,000 per kW. In other words, there is no economy of scale unless you commit to invest almost $80 million. e company has also forfeited any alternative uses for the incremental capital that was invested to manifest this "all at once" approach. Obviously, once invested, this capital can- not be repurposed and remains tied to an underutilized depreciating asset. an IncreMental approach For purveyors of MTDC facilities, incremental expansion via standardized discrete units is precluded owing to their business models. Exemplifying the defini- tion of economies of scale found in Eco- nomics 101 textbooks everywhere, these organizations reduce their costs by using their size to procure discounted volume purchase agreements with their suppli- ers. ese economies then translate into the need to build large facilities designed to support multiple customers. us, the cost efficiencies of MTDC providers drive a business model that requires large "first cost" investments in data center facilities, in turn requiring that the core and shell be built all at once, with their interiors completed in accordance with customer demand. Since MTDC "efficiencies" are only achievable by reducing their high first-cost investments through leasing ca- pacity to multiple tenants, they are forced to locate these sites in market areas that include a high population of their target customers. us, the majority of MTDC facilities are predominantly in a handful of markets (Northern Virginia, New York/ New Jersey and the San Francisco Bay area, for example) where a critical mass of prospective customers resides. As a result, this MTDC model requires the customer to make a high degree of sacrifice. Not only must they relinquish their ability to locate their new data center wherever they need it, they must pre-lease, and pay for, additional space to ensure it's available if they grow over time, since even the largest MTDC facilities have finite data center capacity. the IncreMental requIreMent To effectively implement a data center strategy that eliminates the issues of exorbitant first costs and the loss of option value, the facility must be designed for just such a purpose. Unlike attempting to use size as the method for cost reduction, the data center would achieve this require- ment through the use of a semi-standard design that can be customized to meet specific end-user requirements. Standard in this case is defined as the inclusion of the most necessary data center features, such as Tier III design and construction certification, LEED certifica- tion, and a hardened shell. e resulting solution then provides the customer with a dedicated facility, including the most essential features that can be delivered in a short time frame (under six months from initial ground breaking) without requiring them to spend $20 million to $100 million on a shell while simultane- ously relinquishing the option value of the remaining land. suMMary Because of their historically limited alternatives, many businesses have been forced to justify the inefficiency of their data center implementations by appealing to the myth of scale. Although solutions like prefabricated facilities have attempted to offer prospective users the incremental approach that negates the impact of high first costs and the elimination of alter- natives (option value), ultimately they require the same up-front physical and financial requirements as MTDC alterna- tives. e growth of technologies like the cloud have opened the door to new alternatives that can be quickly delivered and incrementally expanded to take advantage of a new data center economic paradigm. n about the author: Chris Crosby is the CEO of Compass Datacenters

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