Global Prefabricated Modular Datacenter Forecast

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1 Global Prefabricated Modular Datacenter Forecast ENTERING THE MAINSTREAM This report provides an analysis of the market size and growth potential of the prefabricated modular (PFM) datacenter market. Our projections are based on a comprehensive bottom-up market-sizing analysis that incorporates revenue estimates and forecasts for each of more than 50 competing vendors in this sector. This report also identifies and examines key market trends impacting the PFM space. KEY FINDINGS Aggregate PFM datacenter revenue reached $1bn in 2013 and is projected to nearly quadruple by 2018 a fiveyear CAGR of 30.1%. Based on preliminary data, the global market for PFM datacenter products surpassed $1.5bn in 2014, and vendors see a strong pipeline going into Don t mistake a small market for a niche: PFM datacenters are gaining adoption in all industries, with all application types and in all sizes including mission-critical enterprise and colocation facilities. Growth is not evenly distributed: The majority of the growth is still driven by the delivery of a handful of large projects typically served by major vendors, rather than by a wider group of smaller projects and vendors. Although many PFM suppliers reported booming interest from operators, marketing and engineering bandwidth as well as long initial sales cycles will limit the speed with which independent vendors (that are not part of a bigger and diverse organization) can expand. Despite skepticism surrounding their practicality, containerized and custom enclosure-based datacenter form factors keep dominating the scene. However, their lead is eroding as installations of prefabricated building structures are accelerating. North America is the single largest region by sales, but EMEA, driven by some Western European markets plus deployments in emerging economies, is catching up, partly because a good number of ambitious and capable suppliers are concentrated in some Western European countries. In the next phase, we expect APAC to take off and claim a larger share in 2016 and beyond. JAN 2015

2 ABOUT 451 Research is a preeminent information technology research and advisory company. With a core focus on technology innovation and market disruption, we provide essential insight for leaders of the digital economy. More than 100 analysts and consultants deliver that insight via syndicated research, advisory services and live events to over 1,000 client organizations in North America, Europe and around the world. Founded in 2000 and headquartered in New York, 451 Research is a division of The 451 Group Research, LLC and/or its Affiliates. All Rights Reserved. Reproduction and distribution of this publication, in whole or in part, in any form without prior written permission is forbidden. The terms of use regarding distribution, both internally and externally, shall be governed by the terms laid out in your Service Agreement with 451 Research and/or its Affiliates. The information contained herein has been obtained from sources believed to be reliable. 451 Research disclaims all warranties as to the accuracy, completeness or adequacy of such information. Although 451 Research may discuss legal issues related to the information technology business, 451 Research does not provide legal advice or services and their research should not be construed or used as such. 451 Research shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results. The opinions expressed herein are subject to change without notice. New York 20 West 37th Street, 6th Floor New York, NY Phone: Fax: San Francisco 140 Geary Street, 9th Floor San Francisco, CA Phone: Fax: London Paxton House (5th floor), 30 Artillery Lane London, E1 7LS, UK Phone: +44 (0) Fax: +44 (0) Boston 125 Broad Street, 4th Floor Boston, MA Phone: Fax:

3 The following is an excerpt from an independently published 451 Research report, Global Prefabricated Modular Datacenter Forecast released in January To purchase the full report or to learn about additional 451 Research services, please visit or SUMMARY: A TECTONIC SHIFT IN DATACENTER TECHNOLOGY AT LAST The datacenter industry is well-known for its conservative ways, and for good reason. Society and the economy rely ever more on the digital services running out of brick-and-mortar buildings packed with IT equipment, making any interruption increasingly costly. To put it simply, datacenter professionals and managers responsible for operations are not paid to innovate, but to maintain availability of resources. However, sticking to old habits may limit the ability of the business to grow, adapt to changing markets or increase cost efficiencies. Prefabrication has the potential to speed up efficiency gains, both in terms of power and overall costs, in the datacenter. At its core, it is about the shift from on-site construction works to precision manufacturing of structural building blocks. That alone can result in a major improvement in productivity, predictability and capital outlays, but it is much more than that. Prefabrication invites technology innovation. The last five years highlight this effect very well: The number of vendors and available products has mushroomed. 451 Research counts more than 50 vendors that ship prefabricated modular (PFM) datacenters in some shape and form, a tally that is still growing as vendors are attracted by the potential of both the technology and the market. This gives operators many more deployment options than any time before in the history of the industry, which allows datacenter managers and c-level decision-makers to choose according to their appetite for change and cost improvements. This variety of supply and customer approaches can be seen in the variety of deployments. Some operators clearly prefer the way traditional datacenters look, feel and operate, but want to take advantage of the speed and predictability of prefabrication, reducing project risk effectively. Others are willing to change the white space layout and cooling architecture to get to higher levels of power efficiency. There are operators that are open to radical re-thinking, and there are the ones with odd needs. PFM datacenters have something to offer for all of them. 451 Research believes that PFM datacenters ultimately fit business needs better than traditional designs and will quickly gain currency with datacenter design professionals and consultants.

4 Global PFM Forecast FIGURE 1: AGGREGATE PFM REVENUE FORECAST ( ) ($M) $3,958 30% CAGR $2,726 $3,320 $2,175 $1,543 $1, Source: 451 Research, 2015 As a result, 451 Research maintains a strongly positive outlook on the future adoption of PFM datacenters. We project the global market for PFM datacenter products to hit nearly $4bn in 2018, which represents a five-year CAGR of 30.1% or a near-quadrupling in five years (see Figure 1). As the market is still relatively nascent, much of the growth depends on vendors ability to educate the market about their offerings and to funnel capital spending on datacenters into PFM products. Vendors will also need to (continue to) address some misunderstandings and outdated perceptions around PFM datacenters. Compared to our previous forecast based on 2012 data, 2013 and 2014 data came in close to predictions the former is slightly higher, the latter is slightly lower. However, there is a much bigger gap for Our previous forecast projected it to be around $2.5bn, while our latest update expects revenue to come in at $2.2bn. 451 Research views this correction not as a major downgrade, but rather as a slight delay. Expected growth is still very high, at 41% over 2014 in a rather slow-moving industry.

5 FORM FACTORS: ALL SHAPES AND SIZES One of the major misunderstandings that has dogged the PFM industry is that the relevance of PFM datacenters is limited to selected, typically non-core use cases, such as remote microsites, temporary capacity needs or rapid deployment of disaster recovery sites. That was probably true in the past, but certainly is not the case anymore: PFM datacenters are gaining adoption in all industries, with all application types and in all sizes. Whether it is a campus site, a dedicated mission-critical operation for a medium or large enterprise, or a multi-tenant operator, a few racks or multiple megawatts, there are relevant PFM datacenter designs already on the market. At the heart of this misunderstanding is the perception that PFM equals containers (that is, physical, shipping container-sized boxes, not software containers), and also the belief that containers are not quite fit for the job a lack of space to perform work and reduced configuration flexibility hamper their usefulness, the thinking goes. This is not the case. There are various PFM datacenter designs that can be used to create larger contiguous spaces (even some traditional-looking buildings). Modularity doesn t necessitate small enclosed individual modules. Designers are free to create structures of virtually any size, to house a single rack or hundreds of racks. The chief architects and product strategists also decide what level of configuration flexibility they want to provide, at the possible cost of reduced manufacturing and operational efficiency. MICRO-MODULAR DATACENTERS The micro-modular datacenter (MMDC), an emerging form factor, has yet to gain acceptance. In this report we don t break out sales revenue and projections for the form factor, as it is statistically too marginal it is hovering around 1% of the market. However, we consider MMDCs to have great future potential. Should growth occur, as we believe it will, it will be an accelerant in the market that is not currently factored into the figures. But to unlock this potential, it will need to be fully endorsed by either major vendors or operators with considerable purchasing power. Currently, there are only a handful of products on the market, typically from small vendors. The prime example is Elliptical Mobile Solutions, a US-based pure-play vendor and a pioneer of the form factor. Other notable players are Cannon Technologies in the UK and AST Modular, recently acquired by Schneider Electric.

6 Global PFM Forecast As this is the first time we have discussed the MMDC in a market sizing report, for clarity, we include the definition here: A micro-modular datacenter is a form of prefabricated modular datacenter that tightly couples or incorporates both the IT and supporting infrastructure facilities into a self-contained and prefabricated unit or cabinet. Typically, the cooling and climatic controls, as well as power distribution and network connectivity, will be built in; other integrated functions, such as physical security, fire suppression, shock absorption, shielding against electromagnetic interference, power conditioning and UPS or battery may also be provided. In some cases, IT systems will also be incorporated into and supplied with the design, and the entire unit may be optimized and managed for specific purposes such as high-performance computing, very-lowenergy computing, cloud services or analytics. This definition is somewhat formal; a simpler way is to think of the MMDCs as small datacenters that can t be walked into, are delivered in a complete or semi-complete package and are adapted for a purpose. They may, for example, be used for edge-of-network computing, content distribution or as an evolution of branch computers or the server closet. Nonetheless, there are no practical limitations to the application of MMDCs. There is no technical reason they couldn t penetrate core sites (e.g., adding a high-density zone into a data hall) or be the foundation of new deployment types, such as distributed urban-embedded datacenters. We can envision many use cases, especially because MMDCs could enable enterprises to maintain some local computing under their direct control, but move most of their workloads to colocation and the cloud. We believe that MMDCs are likely to prove relevant for many use cases because of their performance and lean cost structure. A further reason why we believe MMDCs have a bright future: bandwidth and latency constraints, and the cost of content distribution, will make it attractive to store some applications and data near the user, in densely populated cities and inside companies, rather than at remote cloud behemoths. There are barriers to MMDC adoption in the enterprise, not least of which is the need to re-introduce new capital costs and technical support issues, against the tide of moving work to colocation and cloud although service providers could deploy MMDCs themselves at or close to enterprise sites to improve performance and lower bandwidth costs. Also, for those with existing datacenters that are not full, the use of new MMDCs outside existing secure and well-connected space may initially seem like and perhaps be an added complexity. Adoption will likely be gradual, but will accelerate as the form factor and use cases become better understood. 451 Research will be watching the segment closely.

7 Demand for datacenter capacity is growing around the world, the result of a host of factors. These factors include economic growth; the increasing computerization of society and the introduction of many new online services; the trend toward centralization of IT services using Internet connectivity; the increasing penetration of consumer and enterprise broadband and its trending reduction in price; and the unprecedented growth of the mobile market. DRIVERS Capacity demand growth: A challenge facing aggregate datacenter space is that demand growth is threatening the datacenter supply/demand equation. The speed at which datacenter capacity is being delivered via costly physical datacenter construction will struggle to keep up with demand, leading to a worsening of the supply/demand situation. This will force some large operators to change their ways. Cost of traditional datacenters: Datacenters require an extremely large capital investment. Datacenter operators are under immense pressure to deliver more capacity, but the build decision is being hampered by the high cost of new datacenters. PFM datacenters give operators additional choice. FSRE drivers: There are four major drivers for investing in modular datacenter technology: financial (cost), speed (capacity delivery time), reliability (improved or maintained uptime) and efficiency (operational and energy) the FSRE drivers. Of these, the financial aspect is the primary dominant force as capital outlays and total lifecycle costs can be better controlled, and with highly efficient products, predictably lowered over traditional operations. Granular capacity: A survey of datacenter designers by The Uptime Institute suggests there is a mismatch between facility sizes and ideal size for capacity addition. On balance, architects and managers would prefer to add increments of capacity that are smaller than the new facilities they build. This can largely be explained by traditional design and build practices, which seek to reduce the unit cost of datacenter capacity via economies of scale based on a bullish multi-year projection of IT load growth. PFM datacenters allow datacenter designers and managers to add exactly the type of capacity they need in the short term to minimize slack and mismatch in space, power and cooling capacity with IT needs. Responses suggest most businesses, between two-thirds and three-quarters, would find critical load increments of 750kW or smaller ideal. At the same time, PFM options also allow companies to defer large chunks of capital expenditures relative to upfront buildouts of the past. Datacenter operators should not dismiss the potential benefits of PFM. If datacenter owners and operators are not at least exploring and considering modular components as a means for datacenter expansion and new builds, they risk putting themselves at a significant disadvantage with regard to scalability, cost and possibly maintenance.

8 Global PFM Forecast INHIBITORS Market perception security/reliability: Existing physical datacenters are expensive and difficult to build. However, they are a proven commodity, while the modular approach is a newcomer and still a largely untested/unproven design. Uptime/reliability is everything for datacenter administrators of all stripes, and anything that may threaten this (such as newer technologies) will be scrutinized. Move toward standardization: Vendors must standardize their offerings, or a major hurdle to wide-scale adoption will continue to limit growth potential in the PFM market. Lack of standardization will limit the flexibility and lower the overall utility of modular designs. Hidden costs of implementation/maintenance: While very closely related to the issue of standardization, if modular datacenters and components prove challenging to integrate and operate, the additional staff/effort required to ensure uptime could impact ROI and weaken demand. Difficulty of building inventories of standardized datacenters: Standardization can take hold only when vendors are willing to stick with one design and stand up to current buyer requests for customization. Building up an inventory of products (taking the customization option away) is not an easy sell in a small, largely unproven space. High cost of failure in the datacenter world: Building/upgrading and maintaining datacenters is a high-stakes endeavor. Unlike investments in software, for example, where failure or disappointment is met with simply ripping and replacing on-premises applications or canceling SaaS subscriptions, datacenter failures are not as simple, and are usually far more expensive and disruptive.

9 There is often a clear and expensive mismatch between the expansion size datacenter designers think would make the most sense for the business and what they are (or have been) building. PFM is changing this: Operators in increasing numbers realize their options are not bound by traditional practices revolving around brick-and-mortar datacenters anymore. Using PFM, facilities managers now have the option to add capacity, whether IT space, cooling, power or a combination of all, at much shorter notice and in more granular increments than before. Shorter lead times improve the visibility of the incoming IT load and let managers build exactly to actual needs, as opposed to building speculatively ahead for multiple years. Better alignment of datacenter capacity and specifications (e.g., density, cooling mode, tier level) reduces stress on capital and helps operational efficiency. Operators that will house a gradually increasing IT load (the exact size and pace of which cannot be always known, as in the case of commercial multi-tenant operators) can defer large chunks of capital by taking advantage of smaller capacity increments without sacrificing overall cost efficiency: Economies of scale are realized by serial manufacturing, and much of the project overhead is absorbed and amortized by the vendor. Tighter management of datacenter capacity also leads to operational efficiency through higher utilization of power and cooling equipment, and in some cases can help with leaner staffing levels. Even if an operator does not expect its IT footprint and needs to change dramatically, it can still benefit from using PFM datacenters. Precision manufacturing and design for optimal airflow can deliver significant savings in energy and water usage: There are some cooling technologies that are available exclusively as an integrated part of a PFM facility. In mild and cool climates, annualized site power-usage effectiveness (PUE) of 1.2 or better can be achieved, which seemed impossible for all but the hyperscale operators just five or six years ago. Fine-grained modularity also helps with partitioning the site into multiple operating environments with different density requirements, climatic set points (or even cooling modes), redundancy levels and security controls. For all these reasons, 451 Research expects the global PFM datacenter market to multiply in size in the coming years. In our five-year outlook from 2013, we project a nearly fourfold expansion by 2018 a CAGR of 30.1%. In this highly conservative and capital-heavy market this is meteoric speed, yet entirely plausible. PFM technology is fast becoming the new baseline for datacenter design, and as more operators adopt it, more will be forced to follow to stay competitive, creating a snowball effect in the market.