02 | Introduction to Data Centers

The evolution of the global data center market has been driven by continuous innovation and adaptation in response to the growing demands of digital infrastructure in an increasingly digitalised world. Historically thought of as centralised facilities housing mainframe computers, the role of the data center has transformed over the past few decades to offer much more than local computing power and data storage.

In the 1980s and 1990s, the rise of technologies involving interconnected computer networks like client-server architecture and Local Area Networks (“LANs”) decentralised data processing. This shift allowed organisations to manage data more flexibly and efficiently, leading to the proliferation of on-premises data centers. The commercialisation of the internet in the mid-1990s further accelerated this trend, as businesses required reliable hosting solutions for online services. This period saw the emergence of colocation services, where companies could rent space in third-party data centers, offering a flexible and scalable digital infrastructure solution.

The late 1990s and early 2000s were significant turning points for the global data center market with the explosion of the internet, which led to a surge in demand for data centers to support websites, email services, e-commerce platforms, and online applications. It also saw the development of cloud computing, with companies like Amazon Web Services (“AWS”), Google Cloud, and Microsoft Azure revolutionising the industry by offering scalable, on-demand cloud services. These cloud providers had the capability to run multiple virtual machines on a single physical server, optimising resource usage and enhancing scalability. This led to the surge of hyperscale data centers as companies recognised the benefit of offloading their physical Information Technology (“IT”) infrastructure and switching to Infrastructure-as-a-Service (“IaaS”), Platform- as-a-Service (“PaaS”) and Software-as-a-Service (“SaaS”) models.

The mid-2010s saw the continued growth of cloud service adoption, with companies opting for both hybrid cloud models and multi-cloud models, blending public cloud services with their own on-premises data centers, allowing for full control over sensitive data while taking advantage of cloud scalability for non-critical workloads, as well as avoiding vendor lock-in and boosting resilience. However, the rise of edge computing was the key development in the global data center market, which addressed the need for real-time data processing resulting from the proliferation of Internet of Things (“IoT”) devices and time-sensitive applications by deploying data centers closer to data sources, reducing latency and improving performance.

More recent developments in the data center market have centered around operational efficiencies and sustainability. As corporates, governments and Intergovernmental Organisations (“IGOs”) race towards Net Zero, the sustainability of data centers is becoming an increasingly hot topic, particularly given the significant amounts of energy facilities consume, leading to the development of green data centers that employ renewable energy sources and energy-efficient hardware. The need to decarbonise data centers has been particularly prominent, given the growing need to deploy data centers, at scale, to cope with the increasing demands of a digitalised world, driven by the rapid adoption of Artificial Intelligence, big data analytics, the rollout of 5G networks and continued growth in demand for cloud service provision.

Today, the data center market is characterised by rapid growth and intense competition, a trend expected to continue, with further innovations in Artificial Intelligence (“AI”), sustainability, and decentralised data processing. As the digital infrastructure requirements of businesses and consumers continue to grow, data centers will remain a critical component of the global digital landscape, inevitably evolving to meet the challenges and opportunities involved.

The evolution of the data center market has spurred material capital deployment across the value chain as developers, constructors, operators and service providers look to capitalise on the market opportunity presented by the growing importance of data centers in an increasingly digitalised world.

Some of the major hyperscalers, including the CSPs, have the size, scale, and skillset to develop, construct, own, and operate their own data centers. However, given the technical, operational, and regulatory complexities involved, most owners require the services of third-party contractors and early-stage developers to bring a project to fruition.

Whilst the development, construction and operation of data centers are nuanced, depending on the size, complexity and location, the below summarises the key activities and milestones to be navigated in each phase:

Major colocation service providers such as Equinix and Digital Realty also play a pivotal role in the data center ecosystem. While these companies are traditionally known for offering colocation and interconnection services, they have expanded into the hyperscale market, providing tailored solutions to meet the needs of large-scale cloud providers. Equinix’s xScale program, for instance, is a dedicated initiative aimed at supporting hyperscale deployments, with an investment pipeline of over $3.0 Bn (Equinix, 2021). Meanwhile, Digital Realty has also made significant investments in hyperscale facilities, particularly through joint ventures, like their recent $7.0 Bn partnership with Blackstone to deliver 500.0MW of hyperscale IT capacity (Blackstone, 2023)

However, despite the strong push into hyperscale, colocation services continue to be essential for both firms. Digital Realty operates 300+ data centers with colocation and white space services (Dgtl Infra, 2023) (Digital Realty, 2023). Equinix, with a network of 260 centers, maintains colocation as a major revenue stream (Dgtl Infra, 2023) (Equinix, 2024)