As the global economy continues to be driven by everything digital, data is proliferating at an unprecedented rate. As data is produced, it must be sent, stored, secured and processed, all of which is leading to substantial growth in data center construction. In fact, global data center construction is expected to generate revenues of approximately $45 billion by 2023.1
In this report, Harris Williams Director Eric Logue and Associate Michael Gessner of the firm’s Industrials Group share their thoughts on where the opportunities are in this growth market for acquirers and investors with industrial expertise.
Six Trends Driving Data Center Growth
As businesses and consumers increasingly embrace the digital economy, data usage will escalate, supporting continued demand for new data centers. This, in turn, will drive robust demand for related products, from uninterrupted power supply systems (UPS) to data center infrastructure management (DCIM) solutions. Six key trends are powering this growth:
1. Big data: Corporations are using more and more data to make decisions, whether that data pertains to customer behavior, operational efficiency or financial performance. Global spending on big data software and services is projected to increase by a more than 10 percent compound annual growth rate (CAGR) through 2027, reaching $103 billion. Seventy-nine percent of enterprise executives say companies that do not embrace big data will lose their competitive position and could face extinction. Eighty-three percent have launched big-data projects to boost their competitive advantage.2
2. Smartphones and mobile infrastructure: The proliferation of smartphone ownership, expansion of cell infrastructure and the vast adoption of mobile video is predicted to drive up mobile data consumption by 700% by 2021.3 By 2021, mobile data is projected to account for 20% of total internet traffic, up from just 8% in 2016.4 The increased speed and coverage of 5G wireless broadband technology promises to compound this growth in mobile data usage.
3. Smart cities: The emerging smart city concept deeply integrates digital technology to make urban services more efficient, reduce resource consumption and facilitate communication between governments and citizens. The smart city market reached $342.4 billion in 2016 and is projected to reach an estimated $774.8 billion by 2021, an overall growth rate of 17.7%.5 Data is at the heart of this concept, adding to the need for new data centers and related products and services.
4. Blockchain: Organizations involved in cryptocurrencies were the largest users of IBM’s 60 data centers last year.6 Members of Harris Williams’ Industrials Group note that, beyond cryptocurrencies, emerging uses of blockchain in finance, insurance, media, agriculture, healthcare, supply chain and other business applications are anticipated to accelerate going forward.
5. Internet of Things (IoT): As more devices exchange information with each other via the internet, an expanding volume of data will have to be analyzed and processed in real time. In fact, Business Insider estimates that 5.6 billion IoT devices will be in use by 2020.7 That will create the need for more data centers in more locations to handle initial processing, plus centralized sites for additional processing.
6. Edge processing: Today, 10% of data is processed outside of a centralized data center or cloud. By 2022, such “edge computing” could account for 50% of the data processed.8 The reason: Continually advancing technology requires faster, or low-latency, processing, which is facilitated by locating data centers closer to the sources of the data being processed.
The Industrials Group notes that as technology evolves, latency requirements will continue to spike, and the importance of edge computing will escalate. A delay in processing can be irritating when it interrupts a download. But in machine-to-machine computing, such as autonomous vehicles, that same delay could be life-threatening. In all circumstances, but especially when there is critical latency, the data center infrastructure in place must match or exceed the technology needs.
The Industrial Opportunity
This strong data center growth is leading to increased interest in companies supplying solutions to data centers. Notably, many of these investment and acquisition opportunities do not require specialized technological expertise. Indeed, suppliers of items such as power management solutions, cooling systems and infrastructure monitoring products are benefitting from the growth in data centers. That creates an opportunity for investors with industrial expertise.
Investing in sophisticated, yet understandable industrial businesses that supply this market can allow investors to gain exposure to technology growth trends that are not typically in the traditional industrial sphere, such as data proliferation, blockchain, edge computing and IoT.
In particular, buyers and investors are increasingly interested in taking advantage of the sector’s fragmentation to create platforms of scale that can provide differentiated offerings. Members of the firm’s Industrials Group note that data center operators appreciate flexible solutions that drive efficiency in the build-out and during ongoing maintenance. They explain that computing power and data storage are commodities, so profitability is driven by controlling costs. Businesses that can help operators better manage their assets will be differentiated.
For instance, with U.S. data centers consuming about 70 billion kilowatt-hours annually, any product that can make power use more efficient could result in substantial savings by data center owners.9
Three Key Differentiators
Based on recent experience, the Harris Williams Industrials Group believes the following three attributes position companies for long-term success in the data center hardware space.
Relentless focus on quality: The high financial and reputational costs of data center failures make quality and reliability worth the additional cost to data center builders, operators and co-locators. Indeed, Delta’s Atlanta data center outage in 2016 forced the airline to cancel 2,000 flights, and it cost the company $150 million. Its cause: an electrical equipment failure within the data center.10
As the Industrials Group explains, the cost of downtime is enormous, which leads to a willingness among data center operators to pay a premium for quality to ensure reliability and safety. Companies that can deliver high-quality, reliable solutions – whether those solutions are energy management software, cables, racks or electrical components – are well positioned to benefit from data center market growth.
Practical innovation: As data center builders work to keep pace with demand, they are looking for suppliers that make life easier for them through practical innovation. This could include providing solutions that save installation time and money, combining software and hardware solutions to provide real-time monitoring and data analytics, and working proactively with clients to make equipment smaller, more efficient and easier to install.
One example: prefabricated data center systems that simply need to be “unboxed and plugged in” upon delivery, dramatically cutting installation time and easing replacement when the time comes. Larger platforms with multiple solutions in their portfolio will be best able to meet the growing demand for this approach.
Companies that succeed in this arena will be aware of where their end users are going and what they’re going to need, and will stay ahead of that through innovation. They will make it simpler to build data centers and to maintain and upgrade them down the road, note professionals from Harris Williams.
Cost-effective customization: Data center suppliers typically sit near one of two ends of a spectrum. At one extreme, smaller companies provide highly customized bundles of equipment tailored to a specific company’s needs, often at a premium and on a limited scale. At the other end of the continuum, larger players typically supply off-the-shelf solutions, trading customization for high value and global scale.
Differentiation often lies between these two poles, note members of the Harris Williams Industrials Group. Winning data center suppliers are combining the service and flexibility of a small company with the scale of a larger one. Such suppliers engage in co-engineering with clients early in the process and create solutions that combine cost-effective production with customization.
Riding the Data Center Growth Curve
The growth in data centers holds significant opportunity for data center hardware companies and for the investors and acquirers interested in them. Data is ubiquitous. It underlines everything. And it’s growing. That’s why companies that provide high-quality, innovative, flexible solutions to data centers are on the radar for so many industrial investors.
Published August 2018
1. Data Center Construction Market Global Outlook and Forecast 2018-2023, Research and Markets, https://www.prnewswire.com/news-releases/45-billion-data-center-construction-market---global-outlook-and-forecast-2018-2023-300653502.html
3. “VNI Global Fixed and Mobile Internet Traffic Forecasts.” Cisco, May 9, 2018, www.cisco.com
4. “Mobile data will skyrocket 700% by 2021,” Business Insider, February 9, 2017, http://www.businessinsider.com/mobile-data-will-skyrocket-700-by-2021-2017-2
5. Nethersole, Adam, “Data Centers Are the Foundation of Smart Cities,” Verne Global, September 11, 2017, https://verneglobal.com/blog/data-centers-are-the-foundation-of-smart-cities
6. “The Rise of Blockchain in Data Centers,” InStor, January 10, 2018, https://blog.instor.com/blockchain-data-centers
7. “EDGE COMPUTING IN THE IoT: Forecasts, Key Benefits, and Top Industries Adopting an Analytics Model That Improves Processing and Cuts Costs,” Business Insider, October 18, 2016, www.businessinsider.com/edge-computing-in-the-iot-forecasts-key-benefits-and-top-industries-adopting-an-analytics-model-that-improves-processing-and-cuts-costs-2016-7
8. “Data Center Solutions at the EDGE: A discussion between Anixter and Equinex”
9. Sverdlik, Yevgeniy, “Here’s How Much Energy Data Centers Consume,” DataCenter Knowledge, June 27, 2016, http://www.datacenterknowledge.com/archives/2016/06/27/heres-how-much-energy-all-us-data-centers-consume
10. Sverdlik, Yevgeniy, “Delta: Data Center Outage Cost Us $150M,” DataCenter Knowledge, September 8, 2016, http://www.datacenterknowledge.com/archives/2016/09/08/delta-data-center-outage-cost-us-150m