The Digital Economy Infrastructure : Data Centers

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It can get quite amusing if you were to ask your circle of friends on what they understand about data centers. Definitely makes for an interesting coffee-break topic.

The fact-of-the matter is that data centers fulfill an important role in the modern economy, out of sight from the public, despite the lack of knowledge on the facilities itself. So much so that more and more companies and organizations are adding data center elements to their portfolio of investments.

This could be an asset class which could interest potential investors who understand the value proposition and market demand, as well as the potential risks involved. Knowledge is power (and data) for those that attain it, and use it well.

Purpose

Most modern businesses need to store data, whether it’s for their email, website, online transactions, working platforms etc; and these can be stored on a server. Servers are like specialized computers and are connected to the business’s local network and usually to the Internet.

For smaller enterprises, they may choose to store their servers in-house and manage them on their own. However, as businesses and their demands grow; in other words, as more data is generated, the more servers and space for them is needed.

As organizations collect more and more data from it’s operations and customers, they need more servers to to consolidate and store this important resource. Thus, the enterprise has two options; either build and maintain their individual physical space to house more and more servers, or to simply tap into the infrastructure and services of a professionally managed, well-equipped, data center to store their critical and important data.

Therefore, the data center is essentially a physical facility which acts as repository where an organization can access, store, and transfer data between it’s users. Such data would then be retrieved for various uses, such as;

  • Emails and File sharing between users.
  • Customer Relationship Management platforms and databases of customers.
  • Enterprise Management Platforms for businesses.
  • Virtual desktops, communications and collaboration requirements.

As virtualization and digitization continue in the 21st century, data centers have become a top priority for businesses. Data centers are not just seen as an external facility for the storage of information and operation models, but rather, key to the very daily functions of a business.

Components

A modern data center would contain several essential components which allow it to do it’s primary task of data storing and dissemination. It would also have a range of supporting systems to provide a suite of varied services as well. Some important components would include;

  • Networking Infrastructure such as switches, modems, routers, and cables to allow data to flow between data storage, the internet, and it’s end-users.
  • Storage Infrastructure, primary and backup storage devices such as hard drives and solid-state drives store data to be retrieved by servers.
  • Computing Resources, supercomputers such as servers which provide the processing, memory, local storage, and network connectivity that allow retrieval of data and drive applications.

In addition to the above-mentioned components, data centers also require significant infrastructure to support the center’s hardware and software. These include power subsystems, uninterruptible power supplies (UPS), ventilation, cooling systems, fire suppression, backup generators, and connections to external networks.

Data Center Tiers

Data center tiers are commonly accepted rankings for the standard and performance of data centers, and are assessed by the Uptime Institute, an advisory organization for data centers. The tier of the data center generally dictates the level of redundancy and how much potential downtime the user could experience over the course of a year. Data centers are ranked from I to IV, with I being the worst-performing of the four and IV being the best-performing.

  • Tier 1: Basic site infrastructure. A Tier 1 data center offers limited protection against physical events. It has single-capacity components and a single, non-redundant distribution path. 
  • Tier 2: Redundant-capacity component site infrastructure. This data center offers improved protection against physical events. It has redundant-capacity components and a single, non-redundant distribution path. 
  • Tier 3: Concurrently maintainable site infrastructure. This data center protects against virtually all physical events, providing redundant-capacity components and multiple independent distribution paths. Each component can be removed or replaced without disrupting services to end users. 
  • Tier 4: Fault-tolerant site infrastructure. This data center provides the highest levels of fault tolerance and redundancy. Redundant-capacity components and multiple independent distribution paths enable concurrent maintainability and one fault anywhere in the installation without causing downtime.

Types Of Data Centers

Many types of data centers and service models are available. Their classification depends on whether they are owned by one or many organizations, how they fit into the grand scheme of the data market, what technologies they use for computing and storage, and even their energy efficiency. There are four main types of data centers;

  • Enterprise Data Centers, these are built, owned, and operated by companies and are optimized for their end users.
  • Managed Hosting Data Centers, These data centers are managed by a third party (or a managed services provider) on behalf of a company. The company leases the equipment and infrastructure instead of buying it.
  • Colocation Data Centers, In such data centers, a company rents space within a data center owned by others and located off company premises. The colocation data center hosts the infrastructure: building, cooling, bandwidth, security, etc., while the company provides and manages the components, including servers, storage, and firewalls.
  • Cloud Data Centers, In this off-premises form of data center, data and applications are hosted by a cloud services provider such as Amazon, Google, Microsoft, or other public cloud providers.
  • Hyperscale Data Centers, essentially an interconnected fleet of data centers, as opposed to just one huge data center to spread risk. These large networks are housed across multiple sites to protect from factors such as natural disasters, power outages or security threats. They are almost endlessly scalable, highly available and offer maximum performance, throughput and redundancy. Normally used by major cloud providers Amazon, Alibaba, Tencent, Microsoft and Google.

Apart from conventional data centers, there are also certain types of unique data centers such as Edge and Containerized Data Centers. These data centers are specially fitted out to execute specific tasks which require certain location-related capabilities.

Demand & Supply

Due to Covid-19, the world experienced a global shift in the way people work, shop, and play. With so many of these options crossing over into the digital space, enterprises are seeing a sustained surge in the amount of data being collected and utilized on a daily basis.

This poses challenges for businesses as the current supply of unused data center space starts to see strong take-up rates even as construction of new data centers takes time to complete and turn operational.

Data center market growth over the last few years has been intensifying, with total Data Center real estate capacity growing in the four key countries in Asia Pacific. Currently, the largest and most well-supported markets for data centers in Asia Pacific are Tokyo, Singapore, Sydney, and Hong Kong. Other up-and-coming markets for data centers include cities like Beijing, Shanghai, Seoul, Jakarta, and Kuala Lumpur.

Despite the pandemic, most established operators and data enterprises such as Equinix and Digital Realty are still committed to building up capacity for more data centers, as they foresee persistent growth in demand for these facilities due to the effects of digitization and IOT. More and more prominent investor groups such as Sovereign funds and Property developers are also jumping on the bandwagon to capitalize on the foreseeable demand for data capacity.

As data capacity is relatively similar to a modern commodity resource, with little differentiation, further supply of new capacity should normalize pricing for data centers. However, the reverse is also true; a overtaking of current supply by swelling demand would also cause upticks in prices.

Growing Trends

With so many new data centers on the horizon, it’s worth thinking about the harsh realities of data center power consumption. Even with innovative developments in sustainable energy solutions, the truth of the matter is that both small and large data centers consume a lot of power.

With the Singapore Ministry of Trade and Industry stating that data centers accounted for about 7 per cent of the country’s total electricity consumption last year, it’s believed that the building and sustaining of even more data centers would lead to an sharp increase in carbon dioxide emissions, which in turn causes a multitude of negative climate change effects.

Still, many experts are divided on the issue, as trends suggest that increased Internet traffic and data loads are countered by increased efficiencies in operating systems. Furthermore, with the increase in Hyper-scale data centers which tend to have better power usage efficiencies (PUE) continue to perpetuate the market, some believe that electricity demand might only sneak up marginally.

Edge Computing is another trend which is gaining ground. As digitization enables more advanced data-based activities such as autonomous vehicles, Internet of Things, and Smart cities, the ability to retrieve critical data almost instantaneously is becoming more and more essential. This introduces the issue of latency, which is the delay between data requests by systems and the actual receipt of the data itself.

By storing said data in Edge data centers, which are smaller facilities located near to population areas, data providers can mitigate the effects of latency and deliver content more aptly to end-users, greatly enhancing the end-user experience.

Conclusion

Seeing the recent valuations for data center related companies surge, it’s clear that many investors see data centers and the data market itself as a solid opportunity to invest in. With demand momentum increasing at such scale, and understanding the necessity of the infrastructure, savvy investors positioning themselves in this asset class can expect to find themselves in the growing market for data capacity.

However, heavily vested shareholders should continue to monitor both market supply, as well as global trends and research on data center energy efficiency, technological advancements, and structural costs as these issues might affect valuations for their holdings in both ways.

References

https://www.channelnewsasia.com/business/new-data-centres-singapore-temporary-pause-climate-change-1355246
https://www.cbre.com/research-and-reports/Asia-Pacific-Data-Centre-Trends_H2-2020
https://www.jll.de/content/dam/jll-com/documents/pdf/research/jll-2020-year-end-data-center-outlook.pdf
https://app.dcbyte.com/knight-frank-data-centres-report/Q1-2021

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