What is more profitable: colocation or own data center?

There are many nuances in choosing between building your own data center and renting a place from a colocation provider: this includes the size of the company, the life cycle of the equipment, and the financial indicators by which the company is assessed. Efim Mirochnik - VP of Data Center Operations in Acronis, a special guest of our blog, has shared his views on how to choose the best option.

One should always consider clouds while defining IT strategy. But there are scenarios when the cloud technolog is not applicable. For instance, your service relies on specific server hardware (like mainframe for a bank or ASIC for crypto mining). Or you don't trust clouds. Or they are too expensive for your tasks. Then there are only two classic choices left.

An own data center is premises purposed for server hardware placement. A data center provides physical security of hardware, electric power, cooling, and network connectivity with the expected reliability level. The data center owner is responsible for its architecture and service quality.

Colocation is a service of data center space rental. The service has an agreed cost and reliability level with a money guarantee. The server hardware of a colocation client is placed on the provider’s premises. Colocation may provide additional services with smart-hands as one of the most important service components. Smart-hands are technicians in the data center that may perform maintenance with the server hardware.

There is no universal answer to the selection between colocation and an own data center. Various factors influence the decision:

The EBITDA (earnings before interests, taxes, depreciation, and amortization) defines some companies' market value. Thus, EBITDA is often used to evaluate startups. This indicator includes only operational expenses. Expenses of building an own data center consist mostly of capital expenses. They are accounted for in the depreciation and amortization line, which is outside of EBITDA. It improves the visible financial valuation of the company.

Own data center requires complex planning. The reason is that the lifecycle of different data center components is different. Thus, cooling equipment may have 6-7 years, UPS has ten years, while UPS batteries may require replacement in 3-4 or 10 years depending on their type. Ideally, the data center should be designed to minimize unexpected further investments.

The next important factor for planning is the growth speed of the IT technology. The requirements to them now and in 4 years will be different. The design and construction of the data center may take 6-18 months. Therefore, it's better to plan with a long term perspective. If IT infrastructure grows twofold per year, it is advisable to introduce modularity or equipment commissioning phases. They allow to increase data center capacity according to demand growth and not to spend investments onto initially unused capacity

Both data center and server hardware require maintenance for the owned data center. Such maintenance needs qualified technical personnel: electricians, cooling engineers, server hardware technicians, physical security, health and safety specialists, and round-the-clock monitoring team.

A specialized organization can assume the task of data center maintenance. An owned data center with contracted maintenance will be an intermediate option between colocation and full ownership.
The farther the data center is from the places with qualified personnel, the more expensive and difficult its maintenance costs. But the land costs will probably be cheaper.

Colocation removes most of these complexities and hands them over from the client to the colocation provider. The colocation service requires regular payments, which are operational expenses and reduce EBITDA. On the other hand, no significant investments are needed. One can start using colocation much faster compared to building a data center.

Colocation costs consist of several parts:

Colocation costs comprise of two parts:

The overall conclusion requires to calculate the data center expenses and get proposals from colocation providers.

It is convenient to use the Total cost of ownership (TCO) for comparison. This will require the following:

TCO = CAPEX + OPEX

The most profitable option will be evident.

Not so obvious complexity appears when calculating planned expenses. It requires a reasonable understanding of the market and strong price level knowledge. If a specification is available, either in-house technical specialists or a specialized design company can make high-level planning. However, one is expected to pay for their service as well.

It is possible to step away from the "what's more profitable" task and switch over to "what's more reasonable" question. Such an approach allows us to throw out an unsuitable option. It will be sufficient to review company size and its tasks.

Constant saving is the usual situation in small companies. If the company already pays for the office, it is possible to dedicate a small pantry or a room for the rack. One can install a few servers there and call it a data center. Additional cooling will probably be required. But most likely, it will be good enough even without cooling.

Such data center expenses are minimal: a dedicated room or a communication cabinet, additional rack UPS, and air conditioner.

Such a solution allows to set up a cheap and fast network because all the workplaces and servers are in the same location. Another benefit is the ability to avoid a long term contract for colocation.

Disadvantages of such an owned data center compared to colocation are numerous:

Small companies might prefer to choose colocation in the following cases:

The reliability requirements for IT infrastructure in medium companies are usually quite significant. The company might have several offices. Or clients might require high service quality. It means that IT infrastructure should be quite reliable.

If there are no own data center specialists, a better option would be to start with colocation.

There could be no colocation providers in the region. Then the company needs to decide on building its own data center.

Here are the essential factors influencing data center spending:

These factors can change their significance depending on the service. Thus, crypto mining may be successful and profitable in cold and places with cheap and reliable electricity, for example, in Siberia.

But this location will not fit mass interactive services if their primary audience is many thousands kilometers away. Long-distance cable laying is quite expensive. Also, network latency will increase, slowing the service down.

When one considers significant risks for big projects, it is easier to use an existing colocation service. However, it might not be more profitable.

If colocation is not available in the region, one might make a long-term agreement with a colocation provider. Your company may get a professionally built and run data center. The provider will have a guaranteed client who starts paying right after the data center commissioning. Such colaboration increases interdependency between the companies but reduces risks for both of them.

The larger the company is, the more significant its tasks can be. At the same time, big companies may have small and medium local objectives.

Thus general recommendations for selection between an own data center and colocation would be the following:

Certain aspects may have not been taken into consideration in this recommendation, but it can replace complicated calculations.

Certain aspects may have not been taken into consideration in this recommendation, but it can replace complicated calculations.