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April 6, 2016

The Colocation Market – Are Optical Networking Worlds Colliding?

Vinay Rathore headshot low resBy Vinay Rathore

Sr. Director, Product Marketing

Colocation services are growing at a cumulative average rate of 30 percent a year and expected to hit about $36 billion in revenue by next year according to 451 Research, as noted in their April 16, 2015 press release. Largely driven by demand for cloud services, innovative optical transport companies have developed revolutionary new platforms and solutions that are enabling data center owners and operators to deliver new services. One exception is traditional telecom operators, who have tried but have yet to succeed in this market. The significance of this market, and why there seem to be some clear winners and losers, was the topic of the Market Watch 4 Panel that I chaired at OFC 2016.

Colocation Blog 1

One key driver of the colocation market is cloud and data center optical networking. Initially, the need for simple and efficient data center to data center interconnection was the catalyst for the recent innovation of optical products that are simple to use, smaller and consume much less power.  Small-form-factor products like the Infinera Cloud Xpress and the Infinera XT Series were built specifically to address this market segment.

Colocation end-users also benefit from this dynamic market. Panelists discussed the critical nature of ease-of-use in this market. Users with little or no optical expertise can install products like the Cloud Xpress to deliver terabits of network bandwidth within a few minutes. In addition, these new products enable colocation providers to offer simple and cost effective solutions to their enterprise users.  Demand by the colocation end-users spans from simple cross-connect services within a single site to sophisticated content delivery network (CDN) services spanning multiple regions. This places even more burden on colocation providers to determine how they want to evolve as they grow. Those with deep pockets will build networks that span the globe while others will stay focused in their core markets.

Today, global colocation providers like Equinix have turned delivery of interconnection services into an art, providing an array of exchange and cross-connect services to meet virtually any operator’s needs. Specialized colocation providers like EdgeConnex have helped lower customer churn and raised network performance of their CDN by pushing content closer to end-users. The adoption of the virtual data center models enable colocation providers to create hybrid data centers by managing some content in a data center while pushing some content much closer to the customer. These examples confirm the varied requirements for this quickly evolving market and show how colocation providers are responding by providing new network services not imagined a few years ago.

One of the closing points highlighted during the OFC Market Watch 4 panel discussion is the apparent lack of traction for traditional telecom operators in the colocation market. Panelists speculated that many telcos lack the flexible service offerings this market needs, which are further burdened by limited network options, thereby severely limiting choice for enterprise customers. Whatever the scenario, telcos are not a major player in the colocation market.

Infinera is keenly focused on enabling cloud and data center networking. About two years ago, Infinera recognized that the existing technology and pace of evolution was insufficient to drive the growth that this market was experiencing. In response, Infinera delivered purpose-built solutions for cloud and data center interconnect, enabling colocation and granting cloud and data center operators as well as enterprise end-users the ability to interconnect to any data center without the complexity of traditional networking gear.  The Cloud Xpress is the world’s first small-form-factor data center interconnect platform, enabling a new business model for this market. Today it is the only small form factor platform (only two rack units [RU] – about 3.5 inches – of rack space) that connects sites up to 150 kilometers (km) apart, and provides up to 500 gigabits per second (Gb/s) of capacity while only consuming 1 watt per Gb/s.  No other platform comes close.

So are the worlds of telcos and colocation providers colliding? Maybe just a little. The colocation market is very diverse, and continues to grow dramatically. The barriers to entry are quite low, making differentiation essential to win. In some markets, multiple colocation providers will struggle to differentiate their services, and those worlds will collide. In other markets, such as Tier 2 and Tier 3 markets, colocation providers will easily succeed by capturing valuable real estate, access to a power grid, and access to the largest customers. One thing is apparent – this market will not be dominated by any telco, at least not anytime soon.

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