This article was originally featured on TechBeacon.

Is colocation dead, now that cloud is the big thing? Quite the opposite. While it’s true that both managed hosting and cloud services have greatly proliferated, during that same time there has been tremendous growth in the use of colocation in the enterprise space — especially for companies that have data center power needs of 200kW and up. They’re outsourcing to colocation providers in larger numbers than ever.

The numbers show this trend. 451 Research valued the global colocation market at just north of $25 billion annually last year, and industry analysts expect the amount to double by 2020. Enterprises are turning to colocation more often for a variety of reasons, but does it make sense for your enterprise to use colocation service providers? For the answer, you need to understand several changes within the market that are driving the colocation industry’s growth.

The cloud: It must be hosted somewhere

 Mission-critical IT infrastructure must be hosted within a mission-critical facility, regardless of the deployment type, billing model, or outsourced service that you’re using. When companies move to the cloud, that cloud still must be hosted somewhere.

The economies of scale that managed hosting and cloud providers can extend into the facilities space. The catch? Managed hosting and cloud are functionally IT services, not facilities services. These hosted service providers still need a data center space in which to place their systems and those systems are often colocated because facilities management is not their specialty. This has had the effect of increasing the size of the typical colocation deployment. We’re seeing fewer, but larger, transactions. By subscribing to cloud services, enterprises are using colocation services more. They just don’t see it.

Enterprises are moving more deployments to colocation

So why has there been a considerable uptick in the number of on-premises 200kW and larger data centers moving to colocation? Several factors have driven this. For one, commoditization and ever-increasing improvements in data center design have tipped the scales in favor of outsourced colocation. Colocation providers have the facilities design expertise and purchasing power through economies of scale to deliver power, space, and cooling at prices that can’t be approached by individual companies that build their own data centers; and colocation service providers run their facilities at a much higher efficiency. The return-on-investment analysis no longer favors companies building their own mission-critical facilities.

Another big factor is the dramatic increase in the demand for higher power density for the latest IT infrastructure. Virtualization and the continued drive to handle more workloads within the same footprint have created challenges for legacy, purpose-built data centers. The cost to retrofit an older facility, with the power and cooling infrastructure necessary to support infrastructure demands, is much higher from a Total Cost of Ownership (TCO) perspective than the cost of using modern colocation facilities.

These two factors have tipped the scales in favor of colocation for all but the very largest deployments—companies such as Amazon, Apple, Google, and Microsoft. The industry has reached a point of maturity where there are very few cases left for building your own mission-critical facility, even for large enterprise deployments, because dedicated colocation companies can do so more cost-effectively and with greater resilience.

This has changed the way in which colocation providers engage with large enterprises, and blurred the lines between the retail and wholesale colocation service spaces. Several years back, it was uncommon to see wholesale deployments below 1 megawatt. Now, it’s routine to see wholesale providers bidding on projects as small as 250kW, and offering more additional services than ever. Conversely, many prominent retail colocation companies are now doing much larger deployments with metered models for consumption, and they are crossing the border into what was traditionally a wholesale territory.

Large enterprise transactions now make up the bulk of new colocation deployments. These changes benefit companies in the market for data center space because there are more service provider options than ever. That means you can expect to find better pricing and more flexible billing options.

Colocation gaining an edge in edge data centers

With individuals consuming more data than ever, the demand for proximity to users to improve the user experience is increasing. That’s why edge data centers are becoming more of a focus. Colocation is often the preferred choice for companies looking to increase end-user performance in different regions because they don’t want to have to build out and staff their own distributed data centers. The inter-connectivity options that most colocation providers offer also allow for many options to improve network performance and service delivery to the end-user. Some enterprises also use colocation as a way to expand quickly — a key business benefit.

This colocation growth trend isn’t as big as the industry has seen in the cloud and enterprise spaces, but expect it to play a bigger role in the future, fueled by the growth in the Internet of Things.

Cloud will replace colocation — eventually 

As technology continues to evolve, so will the enterprise business cases for colocation. The bottom line is that the infrastructure that supports the enterprise will always need to reside in a mission-critical facility and will do so even if it isn’t a direct transaction with a colocation provider. Critical facilities’ costs are bundled into hosting prices. This does not change the need for space; merely the entity that is committing to it.

The decline of colocation will eventually happen once cloud services evolve into a competitive, utility-based compute model, but due to the slow adoption curve for this evolving technology, that transition has a long-term planning horizon. In the short and medium term, as companies weigh the pros and cons of building and managing their own mission-critical IT infrastructure, one thing is clear: In most cases, building your own data center can no longer be justified from a cost, performance, or efficiency perspective.

The maturity of the colocation industry has brought economies of scale, design, and delivery that cannot be matched by an individual, purpose-built facility, in almost every use case, except for the very largest of deployments. So, run the numbers and see for yourself. Unless you’re a Microsoft- or Google-size enterprise, colocation is going to be a compelling option.

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