Changing An Industry of Cottage Industries

If you happen to be following the news around Digital Realty Trust you may have seen the recent announcement of our Pod Architecture Services (PAS) offering.   Although the response has been deafening  there seems to be a lot of questions and confusion around what it is, what it is not, and what this ultimately means for Digital Realty Trust and our place in the industry.

First a simple observation – the Data Center Industry as it stands today is in actuality an industry of cottage industries.   Its an industry dominated by boutique firms in specialized niches all in support of the building out of these large technically complex facilities.  For the initiated its a world full of religious arguments like battery versus rotary, air-side economization versus water-side economization, raised floor versus no raised floor.  To the uninitiated its an industry categorized by mysterious wizards of calculus and fluid dynamics and magical electrical energies.  Its an illusion the wizards of the collective cottage industries are well paid and incented to keep up.   They ply their trade in ensuring that each facility’s creation is a one-off event, and likewise, so is the next one.  Its a world of competing General Contractors, architecture firms, competing electrical and mechanical firms, of specialists in all sizes, shapes and colors.   Ultimately – in my mind there is absolutely nothing wrong with this.  Everyone has the right to earn a buck no matter how inefficient the process. 

After all, there is a real science to most of the technologies and application of design involved in data centers and the magical mysteries they control are real.   They are are all highly trained professionals educated in some very technical areas.   But if we are honest,  each generally looks at the data center world from their own corner of the eco-system and while they solve their own issues and challenges quite handily, they stumble when having to get out of their comfort zone.  When they need to cooperate with other partners in the eco-system and solve more far reaching issues  it almost universally results in those solutions being applied in a one-off or per-job perspective.  I can tell you that leveraging consistency across a large construction program is difficult at best even with multiple projects underway, let alone a single project. 

The challenge of course is that in reality the end-user/owner/purchaser does not view the data center as an assembly of different components but rather as a single data center facility.   The complexity in design and construction are must-have headaches for the business manager who ultimately just wants to sate his need to have capacity for some application or business solution.  

Now into that background enter our POD Architecture Services offering.  In a nutshell it allows those customers who do not necessarily want to lease (or cannot due to regulatory or statutory reasons) a facility to use their own capital in building a facility without all the complexity associated with these buildings.

Our PAS offering is ultimately a way for a company to purchase a data center product.   Leveraging Digital’s Data Center product approach a company can simply select the size and configuration of their facility using the same “SKU’s”  we use internally in building out of our own facilities.   In effect we license the use of our design to these customers so that they enjoy the same benefits as our the customers of our turn-key data center facilities.

This means that customers of our PAS product can leverage our specific designs which are optimized across the four most crucial aspects of the data center lifecycle.   Our facility design is optimized around cost, mission, long term simplicity in operability and efficiency.  This is anchored around a belief that a design is comprised of both upfront first time costs along with the lifetime costs of the facility.    This is an “owners” perspective, which is the only perspective we have.  As the world’s largest data center REIT and wholesaler, we need to take the full picture into account.  We will own these facilities for a very long time. 

Many designs like to optimize around the technology, or around the upfront facility costs, or drive significant complexity in design to ensure that every possible corner case is covered in the facility.  But the fact is if you cut corners up front, you potentially  pay for it over the life of the asset, if you look for the most technologically advanced gear or provide for lots of levers, knobs, and buttons for the ultimate flexibility you open yourself up for more human error or drive more costs in the ongoing operation of the facility.   The owners perspective is incredibly important.    Many times companies allow these decisions to be made by their partner firms (the cottage industries) and this view gets clouded.  Given the complexity of these buildings and the fact that they are not built often by the customers in the first time its hard to maintain that owners perspective without dedicated and vigilant attention.  PAS changes all that as the designs have already been optimized and companies can simply purchase the product they most desire with the guarantee of what they receive on the other end of the process, is what they expected.

Moreover, PAS includes the watchful eye, experience and oversight of our veteran data center construction management.   These are highly qualified program managers who have built tens of data centers and act as highly experienced owners representatives.  The additional benefit being that they have built this product multiples of times and have become very good at the delivery of these types of facilities based upon our standardized product.   In addition, our customers can leverage our significant supply chain of construction partners, parts and equipment which allows for incredible benefits in the speed of delivery of these buildings along with reductions in upfront costs due to our volume purchasing.

This does not mean that Digital is going to become an Architectural or engineering firm and stamp drawings.  This does not mean we will become the general contractor.  This simply means that we will leverage our supply chain to deliver our designs and facilities based upon our best practices on behalf of the customers in a process that is completely managed and delivered by experienced professionals.  We will still have general contractors, and A&E firms, and the like that have experience in building our standardized product.  We are driving towards standardization.   If you believe there is value in having each facility as a one off design, the more power to you. We have a service there too, its call Build to Suit.  PAS is just another step in the formal definition of standard data center product.  Its a key element in modularization of capacity.    It is through standardization by which we can begin to have a larger impact on efficiency, and other key “Green” initiatives.   

I have often referred to my belief that data centers are simply the sub-stations of the Information Utility.   This service allows for commercial companies to start benefitting from the same standardization and efficiency gains that we are making in the wholesale space and enjoy the same cost factors.

Hope that makes things a bit clearer!

 

\Mm

The Cloud Politic – How Regulation, Taxes, and National Borders are shaping the infrastructure of the cloud

Most people think of ‘the cloud’ as a technical place defined by technology, the innovation of software leveraged across a scale of immense proportions and ultimately a belief that its decisions are guided by some kind of altruistic technical meritocracy.  At some levels that is true on others one needs to remember that the ‘cloud’ is ultimately a business.  Whether you are talking about the Google cloud, the Microsoft cloud, Amazon Cloud, or Tom and Harry’s Cloud Emporium, each is a business that ultimately wants to make money.   It never ceases to amaze me that in a perfectly solid technical or business conversation around the cloud people will begin to wax romantic and lose sight of common sense.  These are very smart technical or business savvy people but for some reason the concept of the cloud has been romanticized into something almost philosophical, a belief system,  something that actually takes on the wispy characteristics that the term actually conjures up.  

When you try to bring them down to the reality the cloud is essentially large industrial buildings full of computers, running applications that have achieved regional or even global geo-diversity and redundancy you place yourself in a tricky place that at best labels you a kill-joy and at worst a Blasphemer.

I have been reminded of late of a topic that I have been meaning to write about. As defined by my introduction above, some may find it profane, others will choose to ignore it as it will cause them to come crashing to the ground.   I am talking about the unseemly and terribly disjointed intersection of Government regulation, Taxes, and the Cloud.   This also loops in “the privacy debate” which is a separate conversation almost all to itself.   I hope to touch on privacy but only as it touches these other aspects.

As many of you know my roles past and present have focused around the actual technical delivery and execution of the cloud.    The place where pure software developers fear to tread.  The world of large scale design, construction and operations specifically targeted at a global infrastructure deployment and its continued existence into perpetuity.   Perpetuity you say?  That sounds a bit to grandiose doesn’t it?  My take is that once you have this kind of infrastructure deployed it will become an integral part of how we as a species will continue to evolve in our communications and our technological advances.  Something this cool is powerful.  Something this cool is a game changer.  Something this cool will never escape the watchful eyes of the world governments and in fact it hasn’t. 

There was a recent article at Data Center Knowledge regarding Microsoft’s decision remove its Azure Cloud platform out of the State of Washington and relocate them (whether virtually or physically) to be run in the state of Texas.  Other articles have highlighted similar conversations with Yahoo and the state of Washington, or Google and the state of  North Carolina.   These decisions all have to do with state level taxes and their potential impact on the upfront capital costs or long term operating costs of the cloud.   You are essentially seeing the beginning of a cat and mouse game that will last for some time on a global basis.  States and governments are currently using their blunt, imprecise instruments of rule (regulations and taxes) to try and regulate something they do not yet understand but know they need to play apart of.   Its no secret that technology is advancing faster than our society can gauge its overall impact or its potential effects and the cloud is no different.

In my career I have been responsible for the creation of at least 3 different site selection programs.  Upon these programs were based the criteria and decisions of where to place cloud and data center infrastructure would reside.  Through example and practice,  I have been able to deconstruct other competitors criteria and their relative weightings at least in comparison to my own and a couple of things jump out very quickly at anyone truly studying this space.   While most people can guess the need for adequate power and communications infrastructure, many are surprised that tax and regulation play such a significant role in even the initial sighting of a facility.   The reason is pure economics over the total lifetime of an installation. 

I cannot tell you how often I have economic development councils or business development firms come to me to tell me about the next ‘great’ data center location.  Rich in both power infrastructure and telecommunications, its proximities to institutions of higher learning, etc.   Indeed there are some really great places that would seem ideal for data centers if one allowed them to dwell in the “romanticized cloud”.   What they fail to note, or understand is that there may be legislation or regulation already on the books, or perhaps legislation currently winding its way through the system that could make it an inhospitable place or at least slightly less welcoming to a data center.    As someone responsible for tens of millions or hundreds of millions, or even billions of dollars worth of investment you find yourself in a role where you are reading and researching legislation often.  Many have noted my commentary on the Carbon Reduction Commitment in the UK, or my most recent talks about the current progress and data center impacts of the Waxman-Markey bill in the US House of Representatives.  You pay attention because you have to pay attention.   Your initial site selection is supremely important because you not only need to look for the “easy stuff” like power and fiber, but you need to look longer term, you need to look at the overall commitment of a region or an area to support this kind of infrastructure.   Very large business decisions are being made against these “bets” so you better get them right.  

To be fair the management infrastructure in many of these cloud companies are learning as they go as well.   Most of these firms are software companies who have now been presented with the dilemma of managing large scale capital assets.  Its no longer about Intellectual Property, its about physical property and there are some significant learning curves associated with that.   Add to the mix that this is whole cloud thing is something entirely new.    

One must also keep in mind that even with the best site selection program and the most robust up front due diligence, people change, governments change, rules change and when that happens it can and will have very large impacts on the cloud.   This is not something cloud providers are ignoring either.  Whether its through their software, through infrastructure, through a more modular approach they are trying to solve for the eventuality that things will change.   Think about the potential impacts from a business perspective.

Lets pretend you own a cloud and have just sunk 100M dollars into a facility to house part of your cloud infrastructure.   You spent lots of money in your site selection and up front due diligence to find the very best place to put a data center.   Everything is going great, after 5 years you have a healthy population of servers in that facility, you have found a model to monetize your service, so things are going great, but then the locale where your data center lives changes the game a bit.   They pass a law that states that servers engaged in the delivery of a service are a taxable entity.  Suddenly that place becomes very inhospitable to your business model.   You now have to worry about what that does to your business.   It could be quite disastrous.   Additionally if you rule that such a law would instantly impact your business negatively, you have the small matter of a 100M asset sitting in a region where you cannot use it.   Again a very bad situation.  So how do you architect around this?  Its a challenge that many people are trying to solve.   Whether you want to face it or not, the ‘Cloud’ will ultimately need to be mobile in its design.  Just like its vapory cousins in the sky, the cloud will need to be on the move, even if its a slow move.  Because just as there are forces looking to regulate and control the cloud, there are also forces in play where locales are interested in attracting and cultivating the cloud.  It will be a cycle that repeats itself over and over again.

So far we have looked at this mostly from a taxation perspective.   But there are other regulatory forces in play.    I will use the example of Canada. The friendly frosty neighbors to the great white north of the United States.  Its safe to say that Canada and US have had historically wonderful relations with one another.   However when one looks through the ‘Cloud’ colored looking glass there are some things that jump out to the fore. 

In response to the Patriot Act legislation after 9-11, the Canadian government became concerned with the rights given to the US government with regards to the seizure of online information.  They in turn passed a series of Safe-Harbor-like laws that stated that no personally identifiable information of Canadian citizens could be housed outside of the Canadian borders.    Other countries have done, or are in process with similar laws.   This means that at least some aspects of the cloud will need to be anchored regionally or within specific countries.    A boat can drift even if its anchored and so must components of the cloud, its infrastructure and design will need to accommodate for this.  This touches on the privacy issue I talked about before.   I don’t want to get into the more esoteric conversations of Information and where its allowed to live and not live, I try to stay grounded in the fact that whether my romantic friends like it or not, this type of thing is going to happen and the cloud will need to adapt.

Its important to note that none of the legislation focuses on ‘the cloud’ or ‘data centers’ just yet.   Just as the Waxman-Markey bill or CRC in the UK doesn’t specifically call out data centers, those laws will have significant impacts on the infrastructure and shape of the cloud itself. 

There is an interesting chess board developing between technology versus regulation.   They are inexorably intertwined with one another and each will shape the form of the other in many ways.   A giant cat an mouse game on a global level.   Almost certainly, this evolution wont be  the most “technically superior” solution.  In fact, these complications will make the cloud a confusing place at times.   If you desired to build your own application using only cloud technology, would you subscribe to a service to allow the cloud providers to handle these complications?  Would you and your application  be liable for regulatory failures in the storage of  Azerbaijani-nationals?  Its going to be an interesting time for the cloud moving forward. 

One can easily imagine personally identifiable information housed in countries of origin, but the technology evolving so that their actions on the web are held elsewhere, perhaps even regionally where the actions take place.  You would see new legislation emerging to potentially combat even that strategy and so the cycle will continue.  Likewise you might see certain types of load compute or transaction work moving around the planet to align with more technically savvy or advantageous locales.  Just as the concept of Follow the Moon has emerged for a potential energy savings strategy to move load around based on the lowest cost energy, it might someday be followed with a program similarly move information or work to more “friendly” locales.     The modularity movement of data center design will likely grow as well trying to reduce the overall exposure the cloud firms have in any given market or region.   

On this last note, I am reminded of one of my previous posts. I am firm in my belief that Data Centers will ultimately become the Sub-Stations of the information utility.  In that evolution they will become more industrial, more commoditized, with more intelligence at the software layer to account for all these complexities.  As my own thoughts and views evolve around this I have come to my own strange epiphany.  

Ultimately the large cloud providers should care less and less about the data centers they live in.  These will be software layer attributes to program against.  Business level modifiers on code distribution.   Data Centers should be immaterial components for the Cloud providers.  Nothing more than containers or folders in which to drop their operational code.  Today they are burning through tremendous amounts of capital believing that these facilities will ultimately give them strategic advantage.   Ultimately these advantages will be fleeting and short-lived.  They will soon find themselves in a place where these facilities themselves will become a drag on their balance sheets or cause them to invest more in these aging assets. 

Please don’t get me wrong, the cloud providers have been instrumental in pushing this lethargic industry into thinking differently and evolving.   For that you need give them appropriate accolades.  At some point however, this is bound to turn into a losing proposition for them.  

How’s that for Blasphemy?

\Mm