Are Data Centers the Last Mile of the Twenty-Tens?
In a conversation the other day, there was a random supposition thrown out for discussion as to whether the data center (DC) will become the last mile (LM) of the future. Most Americans have a choice between service providers for their LM needs. Typically there is a RBOC or ILEC, usually a MSO (i.e. cable company) and a wireless broadband carrier. In my home location I have one RBOC (VZ), two MSOs (Comcast and RCN who is an over builder) and seven wireless broadband choices: ATT, VZ, Sprint, MetroPCS, Leap, Clearwire and T-Mobile. I realize that the wireless BB offerings vary from EVDO to 4G. For this post I am going to put aside the wireless BB options as these services typically come with usage caps and I going to focus on the three LM options which for me is really four because VZ offers FTTH (FiOS) or DSL and Comcast and RCN offer DOCSIS options.
As a side note, the current Administration is really misguided in their desire to block the T-Mobile acquisition by AT&T. My only conclusion is American business leaders are not allowed to run their businesses without approval of the Administration. This all goes back Brinton and the revolutionary process that we are working through. If AT&T wanted to declare C11, default on their bonds and give their unions 18% of the company in a DIP process the Administration would have probably approved the transaction in a day or maybe if ATT was solar company they would get the Administration as an investment partner. T-Mobile will now wither away because their parent company will be unwilling to invest in the US with so much investment required in their home country for FTTH builds and managing through or reserving for European unity issues. I am saying this as a former T-Mo customer since 1998, but I recently decided to switch to an iPhone and ATT. Anyone want to wager on the condition of T-Mobile in 3-5 years? One other point, having some weak wireless providers in the market is not a benefit to the consumer.
When the internet connection craze of the 1990s started to move from dialup to always on broadband connections, that is when the value of the LM anchored market share for incumbent service providers. This was made clear to Congress in 1998 when Charles J. McMinn, then CEO of Covad, testified before the U.S. Senate Commerce, Science, and Transportation Subcommittee on Communications and said, “Failing to ensure a competitive environment would condemn the deployment of crucial next-generation digital communication services to the unfettered whims of the ILECs; precisely the opposite of what Congress intended sections of the Telecommunications Act of 1996 to accomplish.”
As I posted earlier here, I see the evolution of the DC and the cloud hype not going quite the way most people expect. The cloud will be a deflationary trend for the market in the same way smartphones and higher capacity connection speeds were for the mobile market. I have posted before here and here that the broadband market has clearly seen the deflationary pressures associated with broadband. As we move deeper into the twenty-tens, will the DC provide a competitive anchor in the manner in which the LM did for incumbent service providers in the 1990s and 2000s?
I see the DC market evolving in three forms. The mega-warehouse scale DCs that Google, Apple, Amazon, Microsoft and others are building are for the consumer market. This is the market for smartphones, tablets, computers, DVRs, media library, applications, games; this is our personal digital footprint. That is big market. Then second market will be the DC for the SMB market focused on business applications. I call this the commercial tier that starts at the point at which a company cannot or does not want to own their IT infrastructure such as data centers. As I wrote the other day there are many reasons why a corporation wants to use a private cloud or private DC over the public cloud and a public DC. I think this market is the smallest of the three markets.
The third market is the F2000 or F5000. I am not really sure and it might be as small as the F500 or F1000. This it the market what wants to use cloud technologies, utility computing and various web based technologies internally within the control of their own IT assets. This is the primary commercial market of the future. Futurists think that within twenty years or so the private DC/cloud market collides with the consumer DC/cloud market. Maybe it does, maybe it does not, but I know they will not collide in the next five years.
My answer to the question I posed at the start is I think the DC/cloud will be an important component for accessing and anchoring the consumer market. Companies will be forced to build their own DC/cloud asset or outsource to a cloud provider. The example I used in an earlier post was NFLX using the AWS infrastructure which you can find here. Over time this strategy could be an issue depending on the deflationary trend of the market. It will be deflationary if it is easy for anyone and everyone to do as the chain of commerce shrinks. Again it goes back to the lessons of Braudel. In the SMB market, I think the RBOCs/ILECs roll up this space. It will be the CLEC demise all over again as pure cloud providers will not be able to support the ecosystem required to sell to the SMB market. In the F500-2500 market, I think companies will want to retain control of assets for a long time and this desire is deeply rooted in the IT culture of the ~F2500 market. The cultural roots of owning and retaining IT assets go back to the introduction of the S/360 mainframe by IBM in 1965. Behaving in a specific manner for forty-six years is a reinforced habit that is hard to break when corporations are flush with cash and IT is considered a competitive asset when deployed well.
* It is all about the network stupid, because it is all about compute. *
** Comments are always welcome in the comments section or in private. **
Note that such a transition from the CO to Datacenters as the source of traffic also increases the value of the fiber/connectivity owners (note I did not say providers as i agree CLECs get destroyed) which isn’t necessarily the RBOCs. I am talking my longstanding book here but consolidation among these providers is creating scarcity when compared with 10 years ago.
Some of the move to 40/100G is in search of spectral efficiency as there just isn’t more fiber to use or lease at attractive rates.
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