Data centre companies ride internet boom

When Usain Bolt ran in the men's 100m final at the London Olympic Games, there was a 30 per cent spike in demand for the BBC's online iPlayer service, as people unable to get to a TV screen watched the event on desktop PCs and mobile devices. Much of this internet traffic came through Telecity, whose data centres host iPlayer.

The Olympics have served to highlight, once again, the explosion of mobile and internet use that is taking place in people's daily lives, from deskworkers watching video streams of sports events to spectators uploading pictures of themselves at the stadium on to sites such as Facebook. All these videos and images must pass through or be stored on servers in data centres somewhere.

Hence there is little surprise that this month Telecity reported a 22 per cent rise in its first-half revenues, while Interxion, its Amsterdam-based rival, reported a 13 per cent rise in sales. Last month Equinix of the US saw an 18 per cent year-on-year rise in second-quarter sales. Revenues for Telehouse, which is owned by Japan's KDDI, grew 13.9 per cent last year.

As enthusiasm for Facebook and Twitter has grown among consumers, so the share prices of the data centre companies have pushed ever upwards. Interxion, which listed in New York last year, has seen its value increase 60 per cent the past year. Equinix and Telecity shares have both quadrupled in value since 2009.

The sharp run-up has left investors asking how much longer this boom can last. The data centre industry suffered a collapse and multiple bankruptcies when the dotcom bubble burst in the early years of the last decade, and investors with long memories wonder if the same could happen again.

"Right now, data centres are in a sweet spot, but is that demand sustainable?" says Milan Radia, analyst at Jefferies.

Cisco has predicted that internet traffic will quadruple over the next four years, so the demand for data is unlikely to wane any time soon. However, there is a great deal more supply coming on to the data centre market, which could mean that companies such as Telecity and Equinix may not be able to command the same price levels they once did.

Part of this is through technical advances, which mean more data can be processed with less power. Widespread use of new, ultra-low power servers, currently being developed, could constrain earnings for data centre companies that charge customers for the number of kilowatts of electricity they use per year. New competition is another threat.

"The idea that we can't build data centres fast enough is just not true" says Tim Anker, founder of the Colocation Exchange, which brokers deals between data centres and their clients. "A lot of new entrants are coming into the market. Five years ago there were just a few Telecity and Telehouse sites in the Docklands available but now there is a lot more choice."

Private equity-backed companies such as Virtus, which is supported by Frogmore and Brockton Capital, and Infinity, which is backed by Rothschild, have recently come into the market. Infinity, Volta – a joint venture between Apollo Global Real Estate and Glebe – and Gyron, recently bought by Japan's NTT Com, are all planning new data centres in London to tap the growing demand.

Prices at some of these newer facilities, especially if they are a little further from the centre of London, can be half those of Telecity or Interxion, Mr Anker says. Telecity's results indicate that pricing may already be under some pressure, with increases slowing from 20 per cent in 2007 to about 3 to 5 per cent this year.

That said, most analysts believe Telecity, Interxion and Equinix will continue to retain an advantage over any upstarts. Their businesses are not just about having a lot of data centre capacity "they are about having it in the right, central location where many telecoms companies are already connecting to each other.

Telehouse, the first data centre of its type in London, still houses two-thirds of London's internet exchange, making it one of the key internet hubs in Europe. An established Telecity data centre has direct connections to hundreds of telecoms operators, and content companies want to be in these locations to make sure they get the fastest, most direct route to viewers.

This is why companies such as Amazon, or Facebook, which have their own sprawling data centres, usually in rural locations, still need to route data through Telecity and Equinix's highly connected hubs.

"Amazons want to be near Apples and so they all want to be in these highly concentrated, central London data centres," said Andy Bryant, analyst at Cenkos. "There may be excess supply in the suburbs, but the established data centres can still command a premium."

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