Data hosting centers and data storage analysts agree: the shift toward cloud computing is the single, most important trend in the space — more specifically, the shift from private cloud to a public cloud. The more traditional model where a company would pay upfront for its own hardware and host and compute data in-house is becoming more and more scarce, and companies are becoming more comfortable hosting more of their data in the public cloud, along with much of the computing itself. The cloud is introducing a paradigm shift where the software as a service model is being used instead of upfront software and hardware buys.
This shift, however, is taking longer than some analysts had previously expected, as it’s a complex shift with many moving parts. There are some segments that are growing faster, such as security, data center switching and infrastructure software, but analysts do not expect total IT spending to grow meaningfully. In this migration of data from on-premise to the cloud, some of the largest Web 2.0 players are opting for white label hardware, forgoing premium hardware and preferring commodity-type devices, which has benefited some of the optical components companies. They say there has been a move away from expensive specialized hardware and toward commodity servers, switches and storage equipment. Hardware companies are realizing that this era of winning based on speeds and feeds is over, and that equipment needs to have some differentiated technology such as analytics or security on top. Optical components companies could benefit further as data centers upgrade toward new architecture, replacing older technologies and standards such as copper in preference for fiber optics, which allow for faster data transfer speeds.
Analysts say the shift from private cloud to public cloud is causing a diminution of the expected longer-term growth potential of virtually every company in the space. They add that the shift is somewhat aided by the volatile economy, which is pressuring people to be more efficient. It is also catalyzing conversations to move to the public cloud at a faster pace. Analyst and investor sentiment has been positive on the data center REITs for the last 12 to 18 months, and they say performance for data center REITs is up around 110%. The sentiment wasn’t positive a couple years ago, but there has been a shift driven largely by the cloud service providers.
Analysts say the industry has experienced both growth and multiple expansion, and although they don’t expect much multiple expansion in the coming years, they say organic growth thanks to good levels of demand can be expected. They also say consolidation could increase in the space. Security is a core issue in IT infrastructure.
Full report available here.