May 2014 Market.Bytes DATA CENTER Order & Progress As Brazil prepares itself for the global stage, the world s second largest emerging market is slowly evolving its infrastructure to lure elite data center users. C&W takes a deeper look at the Brazilian market for trends, perils and a first-hand account of navigating an ever-changing landscape. Entry Point: Brazil, Page 2 Multi-Tenant Data Center Market, Page 6 Client Profile: Ascenty, Page 8
ENTRY POINT: The world s attention is firmly on Brazil. With the country set to host this year s World Cup and the 2016 Summer Olympics, the largest economy in South America will welcome the world with open arms. Global events are both a catalyst and key indicator of Brazil s economic progress. Currently, Brazil garners the fourth largest level of Foreign Direct Investment (FDI) in the world behind only the U.S., China & Hong Kong. That environment has created the largest, most stable economy in Latin America and the seventh largest domestic IT market in the world. ECONOMIC OVERVIEW RECOVERY STRENGTHENING Brazil underwent a typical business down cycle, bottoming in 2012. Public and private infrastructure investment have pushed the economy into recovery. Despite only moderate economic growth, unemployment currently near historical lows. GDP growth forecast to average 2-4% between 2014-16. EXPANDING MIDDLE CLASS Brazil s economic growth and increasing wealth has created a rapidly expanding consumer market as a significant share of low income groups join the middle class, estimated at 118 million in 2013 (up from 66 million a decade earlier). DATA CENTER DEMAND DRIVERS POPULATION With a population of 200 million, Brazil is the fifth-largest country in the world and ranks as the seventh largest economy. Brazil ranks fifth globally in number of internet users (99.3 million) and fourth in number of mobile phones in use (271 million). Smart phone usage has accelerated, although Brazil still has very low smart phone penetration showing tremendous potential. CONNECTIVITY & INFRASTRUCTURE Brazil has the most mature fiber infrastructure and best connectivity in Latin America to the U.S. Terrestrial fiber infrastructure within Brazil (and Latin America in general) has inconsistent coverage and capacity. High capacity bandwidth is expensive when available and dark fiber is a scarce resource. There are several accelerated efforts underway to install new submarine fiber routes to Brazil before the World Cup and Olympics which will drive down future bandwidth costs. OIL & GAS INDUSTRY Despite recent domestic industry struggles, the discovery of huge amounts of oil in the deep-sea pre-salt layer will drive heavy long-term investment. WORLD STAGE Brazil is hosting two of the largest international sporting events in the upcoming years, including the World Cup in 2014 and the 2016 Summer Olympics. 2
MARKET.BYTES MARKET CHALLENGES & OPPORTUNITIES Like any emerging market, Brazil presents unique challenges for international companies interested in navigating its business market. However, Brazil stacks up favorably to other BRIC nations, where power grid challenges, privacy issues and ownership limitations in countries like India and China have proven too prohibitive and undesirable for most tenants and enterprises to tackle. Many American companies from Dell to Hewlett Packard to Amazon have successfully built and now operate data centers in the country, showing Brazil is a preferred destination when compared to other emerging markets with the spate of recent data enter expansions largely the result of foreign investment (primarily U.S.). TAX ISSUES AND HURDLES Brazil s taxes, duties and customs taxes are high and very complex and are a critical factor to consider regarding deployment, importation and overall operations. It is difficult to avoid importation of major mechanical and electrical systems required for large data centers because larger size equipment is not available. Servers and network equipment can be sourced domestically thereby reducing tariffs. Corporate Income Tax Rate: 34-40% (total). Limited incentives in place for data centers currently. SKILLED LABOR CONCERNS Brazil is currently facing a shortage of trained IT professionals, with an estimated shortfall of 750,000 workers by 2020 among the highest globally. Strong unions and work rules are a challenge to a data center s 24/7 operating standards. IMPACT OF INTERNET LEGISLATION In late March, Brazilian lawmakers amended legislation (Marco Civil da Internet) so it no longer contains a provision requiring Internet companies (including hybrid or cloud services) to store data on local servers in the country. However, there are still broad international concerns about the privacy/ security of online data and future proposed rules and guidelines about data localization need to be closely monitored. ADVANTAGEOUS PROPERTY RIGHTS Unlike India and China, foreign entities are permitted full property rights in Brazil, a key differentiator among emerging markets. LIMITED RISK FROM NATURAL DISASTERS No natural disaster risk in the São Paulo market. Flood risk in parts of Rio de Janeiro. Tornadoes only prevalent in northern-most part of the country. Landslides during the rainy season impact private property and public infrastructure for power, telecommunications and transportation mainly in the Rio de Janeiro region. 3
CRITICAL FACTORS POWER INFRASTRUCTURE Brazil s power infrastructure has historically been inferior to that of the U.S. in terms of availability and reliability. However, this gap is dwindling as infrastructure enhancements ahead of the World Cup and Olympics will boost power capacity and fortify its electrical grid and distribution infrastructure. More than 70% power derived from hydro-electric often leading to seasonal and drought-related shortages. Transmission and generation is under government control. Distribution is geographically based and fragmented, largely controlled by the private sector. AES Electropaulo and CPFL are the largest distributors serving sizable areas within the State of São Paulo. AVAILABILITY & DEPENDABILITY Each municipality has its own transmission network with no major cross connections to establish regional or national grids, raising reliability concerns. Most areas have only one provider, leaving many data center operators with difficulty and long timelines to bring in diverse power feeds. Frequency and duration of interruptions vary by distributor. National annual averages are approximately 12 interruptions and over 16 hours, in line with other Latin American countries. US$0.15-0.16 Average pricing per kilowatt hour in Brazil Brazil usually fails to meet demand and is a net importer of power. PRICING Cost of generation is low because of the amount of hydro power, though it is subject to price fluctuation and supply shortage in drought years. Delivered cost of electricity is high mostly due to multiple taxes at the federal, state and local levels. Average pricing US$0.15-0.16 per kwh. Power may be purchased on the open market for large power users but is subject to large price fluctuations. 4
CRITICAL FACTORS NETWORK INFRASTRUCTURE Brazil has the most mature fiber infrastructure in South America, however it is substandard compared to the U.S. market. 10 submarine cables bring fiber to the country, with the majority making landfall at Fortaleza before funneling to São Paulo or Rio de Janeiro. Virtually all of South America s connectivity is non-terrestrial/ submarine-based and as a result suffers greater latency due to longer-than-necessary cable routes. São Paolo is nearly 4,000 miles from Miami (the closest mature telecom hub for South America). KEY INTERNET EXCHANGES 80 percent Amount of internet traffic from Latin America that passes through Terremark/Verizon facility, NAP of the Americas PTT maintains the main internet exchange points in Brazil (22 in total) including the most important exchange point in São Paulo. The dominant telecom and ISP carriers in Brazil, Embratel and Telefonica, do not participate in settlement-free peering resulting in network congestion and performance issues. NAP of the Americas (Terremark/Verizon) is a major internet exchange point for all of Latin America. Located in Miami, it is estimated that over 80% of all internet traffic from Central and South America pass through this location. Terremark/Verizon s facility in Baueri is a major network access point for many international and domestic telecom providers. NEWS/TRENDS In preparation for the World Cup and 2016 Summer Olympics, Brazil will see several new submarine fiber cables installed, including WASACE (to Nigeria, Miami and Virginia Beach), Seabras-1 (to New York), AMX-1 (Rio to Miami) and BRICS Cable (to Russia, China and India). 5
DATA CENTER SIZE MATURITY: GLOBAL MARKET COMPARISON SOURCE: Cushman & Wakefield Research MULTI-TENANT DATA CENTER MARKET OVERVIEW STILL CONSIDERED AN EMERGING MARKET Despite being the seventh largest economy in the world, there is currently less than 500,000 sf of operational data center space in Brazil this is smaller than the data center inventory of Miami (+600,000 sf) which is considered only a tertiary market in the U.S. There are currently only three U.S.-based data center providers in Brazil: Equinix (who acquired local provider ALOG) Level 3 Communications (via its acquisition of Global Crossing) Verizon (via Terremark) Pan-regional telco companies are also key providers, including Spain-based Telefonica and Mexico-based America Movil (who acquired and owns Brazil s Embratel since 2003). Most facilities are less than 10,000 sf and have densities of less than 100 watts per square foot. Significant outages are common. Terremark NAP do Brasil facility in Tambore is considered one of the key data centers in Brazil. The facility offers connectivity to all major carriers in Brazil and has interconnectivity with Terremark s NAP of the Americas facility in Miami. LIMITED WHOLESALE MARKET Only a limited handful of operators are currently capable of providing a solution for a deployment larger than 500 kw. The beginning of a legitimate wholesale market in Brazil only emerged in 2012. However, within 12 months over 15 MW of wholesale space has been leased in the State of São Paulo. Colocation providers focus on value-add services such as managed hosting, cloud, IT outsourcing, etc. which comprise upwards of 60% of revenue. Several international data center providers are vetting expansion opportunities in the country, including driven by customer expansion needs in Tambore and oil and gas sector demand in Rio de Janeiro. 15 MW Amount of capacity leased in the State of São Paulo within the first 12 months of traditional wholesale product being available. 6
MULTI-TENANT DATA CENTER MARKET OVERVIEW KEY SUBMARKETS SÃO PAULO Belo Horizonte São Paulo Fortaleza Recife Rio De Janeiro Largest data center market in South America that accounts for 50% of capacity in Brazil approximately 450,000 operational square feet. Demand driven by financial institutions and multinational firms. Located near the stock exchange, the suburb of Barueri is emerging as the new data center centric area. Major providers include: Telefonica-Vivo, T-Systems, ALOG-Equinix, Terremark-Verizon, Level 3, UOLDiveo, Matrix, Ascenty and Oi. The Campinas and Hortolandia region located approximately 50+ miles outside of São Paulo is known as the Brazilian Silicon Valley. Ascenty, IBM, Lucent, Samsung, Dell, Nortel, 3M Ericsson and Texas Instruments are all located in the region. The first wholesale data center options in the country are being offered in Campinas, with capacity following in the areas of Hortolandia, Jundiai and Fortaleza. IBM, Microsoft and Amazon are the largest MTDC enterprise data center occupants, all with deployments greater than 10 MW. Porto Alegre 50 percent Capacity of Brazil s data center market that São Paulo occupies, with more than 450,000 operational sf RIO DE JANEIRO Second largest data center market in Brazil operational square footage less than 150,000 sf. Providers include ALOG-Equinix, Oi, Tivit and Level 3. Many oil & gas companies, including Petrobras, are headquartered in this market. SECONDARY LOCATIONS Belo Horizonte/Minais Gerais south east Brazil. Porto Alegre southern Brazil. Recife north east, fast-growing tech cluster around Porto Digital innovation center. 7
ASCENTY CEO: PRESENTS GREAT OPPORTUNITY, CHALLENGE A twist of fate changed Ascenty CEO Chris Torto from tourist into trailblazer. It was the mid-80s, and I was trying to move to Italy, said Torto, who is currently on his fourth business venture in Brazil. My parents migrated from Italy to the (United States) in the 1920s, and I wanted to get out of the United States. The company I was working for said we ve got nothing for you in Italy, but we have an opening in Brazil. That s how I ended up here. The Boston native found himself moving to Brazil in 1988. Since that time, Torto has taken two companies public and helped start his own cable TV company. If there is anyone who understands Brazil s infrastructure needs, it s him. Torto, who splits his time between San Francisco and Brazil, shared some of his experiences navigating the market. How has the push for the Internet Civil Law in the local government affected your business? I think that even before (the bill) you had a lot of multinational companies wanting to have a physical presence in Brazil independent of the law. So you ve got this happening. What I ve seen with the law, which has been going on for about a year now, is that some of those plans are just getting accelerated. Independent whether Brazil has a law or not, companies realize it makes a lot of sense to have a physical presence, to have low latencies, to have better service closer to the customer by installing in Brazil. All it has really done is expedite plans that these companies had originally. So they can then say, well I already had it installed. I wasn t doing it because of the law. We ve seen that from a number of different companies, that have signed with us as well. What should your clients understand about doing business in Brazil? Brazil is one of those countries where there are unique dynamics to many of the laws. You have to know the area. It makes it difficult for many American companies because they are accustomed to strict by-the-books guidelines whereas in Brazil there is a need to work with the government on several issues. You are always in a dispute because things are so poorly written from a legislative statement that you re always in discussion. It just makes it tough for U.S. companies when they come down because they see it and go, boy there is a lot of gray area. How do we manage this? Without that experience it is difficult. ASCENTY COMPANY PROFILE New carrier-neutral provider Ascenty opened its first data center in Campinas late in 2012. Backed by U.S. private equity firm Great Hill Partners and led by Chris Torto, former CEO of Brazilian cable company Vivax, Ascenty is the first wholesale provider in Brazil. The company also provides retail/colocation, managed services and cloud offerings along with its own fiber optic network that connects several cities and key data centers in the São Paulo region. The provider has full build out capacity of more than 30 MW in three locations: the first three phases of their Campinas facility will encompass 3.6 MW of operational space. A second facility in Jundiai is schedule to open in early Q2 2014 (12 MW) with a third facility in Hortolandia (10 MW) slated to open in late 2014. Ascenty s entry into Brazil is a key market event. Ability to deliver cheaper connectivity and dark fiber has created the opportunity to provide less expensive and higher quality data centers further from the City of São Paulo. Ascenty is the only provider currently building to Tier III specifications and offering high density deployment options for larger wholesale requirements. 8
How much has the landscape for business changed since you arrived? It s improved dramatically since 1988 when I first moved to Brazil. It s night and day. What has not changed is the bureaucratic nature of the country. It s a difficult place to do business. It s very bureaucratic. Beyond the costs, there is just a tremendous amount of legislation on taxes. We have more people working in our tax department than our accounting department just because there are so many forms to fill out. That s a cost in and of itself. It was the same 25 years ago as it is today. And what we re trying to do whether working with a large U.S. company, multinational company, or even local, we re trying to make it easy. If you come to us, we ll take care of the bureaucracy and you can just focus on your business. And that s why we ve been successful getting Microsoft and Amazon as customers. Because we make it easy for them. It s improved dramatically since 1988 when I first moved to Brazil. It s night and day. What has not changed is the bureaucratic nature of the country. It s a difficult place to do business. What are the issues that challenge business? The security issue in Brazil is something that is a challenge. It s not a rock solid safe place, but it s not this militia out roaming the streets that gets portrayed in the press. That s not what s happening. I ve lived there for 26 years, and I ve never been robbed. I ve never had a single issue. So it s a little blown out of proportion by the media. Power costs are a concern. The reality of the situation is that power costs are significantly higher than in the U.S. If you re paying anywhere from five to 12 cents (in the United States), Brazil is closer to 15 to 16 cents per kilowatt an hour. So power costs are higher. Second, importing anything specialty in terms of servers or IT equipment, there s a pretty hefty importation tax. You can build your case around it, but it s significantly higher than the U.S. On average, if a server cost me a grand in the U.S., it s probably going to cost me $2,000 in Brazil. That s a reality. So it is more expensive to maintain an IT environment in Brazil than the U.S., but at the same time, why is Microsoft, why is Amazon, why are all these guys doing large deployments in Brazil? Because they have to be closer to their customers and latency is an issue. Continued on next page. 9
What will it take to make Brazil on par with U.S. data center standards? That s not going to happen. It s always going to be a developing country. It s always going to be a challenge, but it s a large country with 200 plus million people and high technology usage. Brazil is a top three market for both Facebook and Twitter. You can see they re early adopters of technology, so you can t ignore it. Independent of the difficulties, you just have to find a way to make it work. It s never going to become Ashburn Virgina, not in our lifetimes. My realistic feeling is that it is a market that can t be ignored. It s a huge market. It s going to grow, and it s going to grow anywhere between two and four percent every year. That s not China growth, but it s not negative growth. It s always going to be a difficult place to do business. It s a highly bureaucratic country, and that to me is a barrier to entry. Data center guys want to go and just pull out because life is short for them. But for the guys that have to be there, we re in the perfect position to serve them. It is a market that can t be ignored. It s going to grow anywhere between 2-4 percent every year. What is unique about Ascenty in the marketplace? We re the only ones currently out there building Tier III data centers for the wholesale market in Brazil. So we actually have the service to offer these customers that looks and feels like products in more established, mature markets. I think the second thing is our agility. We re flexible, we re agile, and we re willing to do basically anything if it makes business sense of course to make it viable for the customer. I ll give you an example: the first time we allowed a U.S. company s technical team a chance to review our one lines and suggest changes, and we took those suggestions and actually implemented them. It s the first time that has ever happened for them. We re a much more entrepreneurial company. At other global data center providers, you essentially have to navigate multiple levels to get anything done. At the end of the day, at our company you can talk to me or anyone of my direct reports. We ll review with our team, we ll make a decision and we ll make it the same day. We see huge opportunity. We re opportunistic, obviously. To be honest with you, we weren t even focusing on the wholesale data center opportunity a year ago. Now we re seeing there s so much demand for it, we might have to accelerate our plans on a lot of different fronts. So I think we re being opportunistic on this side. 10
JEFF WEST Director of Data Center Research Portland, OR (503) 279-1772 jeff.west@cushwake.com SEAN IVERY Senior Director San Francisco, CA (415) 773-3543 sean.ivery@cushwake.com BILL DOUGHERTY Executive Director Walnut Creek, CA (925) 274-2804 bill.dougherty@cushwake.com JENNIE KARNES Director San Francisco, CA (813) 727-6001 jennie.karnes@cushwake.com ADAM SHARP Senior Associate San Francisco, CA (415) 773-3548 adam.sharp@cushwake.com Cushman & Wakefield is the world s largest privately-held commercial real estate services firm. The company advises and represents clients on all aspects of property occupancy and investment, and has established a preeminent position in the world s major markets, as evidenced by its frequent involvement in many of the most significant property leases, sales and management assignments. Founded in 1917, it has approximately 250 offices in 60 countries, employing more than 16,000 professionals. It offers a complete range of services for all property types, including leasing, sales and acquisitions, equity, debt and structured finance, corporate finance and investment banking, corporate services, property management, facilities management, project management, consulting and appraisal. The firm has nearly $4 billion in assets under management globally. A recognized leader in local and global real estate research, the firm publishes its market information and studies online at www.cushmanwakefield.com/knowledge.