One market. Two players. And a big difference in plans to help companies in China store and manage their ever-growing information systems.
That’s the picture painted by two rival foreign data center providers competing for mainland business that’s tipped to grow in the double digits and top 1.2 trillion yuan (US$198 billion) in 2017.
Nasdaq-listed Equinix (EQIX.US), the world’s largest player, is pushing ahead with its upstream strategy of offering only co-location facilities to multinational clients. But Asia’s Pacnet is opting to share profits with a local partner in return for a license that will let it become a one-stop IT services shop on the mainland.
Independent IT research firm Gartner says both models can work in China because the field is still wide open but competitors can profit more if they go downstream to offer additional IT solution services.
Alex Tam, Equinix’s managing director for Greater China, said the company has no plan to pursue the internet data center (IDC) license needed for the full suite of internet offerings, adding that most companies just want to use data centers for internal operations. If its clients do demand internet services, Equinix can refer them to its strategic partners, China Telecom (00728.HK) and China Unicom (00762.HK).
“We only provide co-location facilities, like space and power [for housing data storage systems], but not any service related to telecoms and the internet … so we do not need the [IDC] license,” Tam told the Hong Kong Economic Journal’s EJ Insight.
“Many people have a misconception that data centers must have something to do with the internet, but they don’t … Our core business is data centers and not telecoms. This differentiates us from our competitors.”
Equinix operates four data centers in China and one so-called disaster recovery center in Shanghai, and has about 50 clients, including multinational financial institutions.
The company provides what is known as carrier-neutral data centers, which means clients’ servers can link to multiple networks. The data center provider signs deals with each carrier to ensure interconnectivity between networks. It’s a robust approach because it also lets clients quickly switch carriers in an emergency.
Other companies, usually telecoms firms, set up carrier-specific centers, which can charge clients extra for using a different carrier.
Head in the cloud
Pacnet, which operates a submarine cable network, is also going the carrier-neutral route but its roster includes services such as a cloud computing, email hosting and internet.
“They [Equinix] may have connectivity with China Telecom, China Unicom and China Mobile, but they can only sell the rack space … then the customers would have to go pick either one of them to have their bandwidth, and they would pay them separately,” Jim Fagan, Pacnet’s president of managed services, said.
“It will make it difficult for customers to do a contract with a data center provider, then have a contract with a telecom provider and negotiate terms with both, pay separate bills, separate invoices.”
But extra services mean extra costs — at least for the supplier. To provide internet value-added services, Pacnet needs the IDC licenses, and for that it has to give up some stake in its data center business. It formed a 50-50 joint venture with Shenzhen-based Zhong Ren Telecom called Pacnet Business Solutions (China) in 2008 — a deal Fagan said was worth it.
“We have to share half of our profits, but it’s a fruitful partnership for both of us,” he said.
“We started to see [business opportunities from] this convergence of a data center and network … If you look at the dynamics of the China data center market and cloud [computing] market, they point to tremendous growth. So obviously we want to have the ability to take advantage of that.”
Pacnet has six data centers and points of presence in China in Beijing, Chengdu, Shanghai, Shenzhen, Xi’an and Chongqing. A new facility in Tianjin is expected to start operation in the middle of this year. It has 18 data centers the Asia-Pacific and its clients include IT solution provider Acclivis in Singapore and Sundaram Business Services in India.
Gartner principal analyst Vincent Fu said internet data centers could give Pacnet a higher profit margin.
“The profit from a co-location center is lower. They provide space and power, but not networks … internet hosting can make higher profits,” Fu said. “And it’s not just about profits. Zhong Ren Telecom can also help it with client support and operations.”
Equinix’s China strategy is in line with its global position as a co-location provider, he said.
He said demand for data centers is growing on the mainland but the local product still lags international standards. Those opportunities could see more established players look to the world’s second-largest economy for business.
“The demand from large enterprises for data centers is increasing but it’s not satisfied because domestic firms lack the experience, especially in high-grid data centers. Therefore many foreign firms want to enter the mainland market,” Fu said.
The market is still highly fragmented, with many small players and most of the top data centers located in Beijing and Shanghai. In cloud computing, for example, local tech and hosting services are one or two years behind foreign firms, but offshore companies have less than 20 percent of the market.
One thing on Equinix’s side is scale. Its 95 data centers serve 4,400 clients in more than 15 countries, including US-based foreign exchange provider FXCM Inc. and Aquis Exchange Ltd., a pan-European cash equities exchange.
“Many of our clients want to enter the China market nowadays, and they will need IT support and infrastructure on the mainland when doing so,” Tam said. But it is also about helping Chinese companies to connect with network providers worldwide when they expand their global footprint.
One of them is internet content juggernaut Tencent Holdings Ltd. (00700.HK), which said in December that it would deploy Equinix’s Hong Kong data center for future expansion in the global market.
“This [helping domestic firms go global] is something smaller data center operators cannot do.”
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