Tuesday, June 13th, 2017

Time	Event
12:00p	DCK Investor Edge: Digital Realty Signs Biggest Hyper-Scale Deal After All Over time, Digital Realty Trust’s inability to sign and deliver purpose-build data centers for hyper-scale cloud service providers in major US markets could become an existential risk. To mitigate, the company signed the largest US hyper-scale deal of the year, a $7.6 billion merger with wholesale rival DuPont Fabros Technology (DFT). The situation’s existential nature is one way to explain the premium Digital (DLR) has agreed to pay. If there were any lingering questions regarding a “new normal” for wholesale data center leasing, Digital Realty’s CEO Bill Stein put them to rest last Friday. Super-wholesale is now officially an asset class of its own. If things evolve according to plan, sometime during the second half of 2017 DuPont Fabros will become part of Digital’s hyper-scale development arm. Notably, the land holdings of both REITs are complimentary, with the exception of Silicon Valley, where neither have sites remaining for expansion. Why Now? In 2015, Digital Realty made a bold move to offer connectivity-focused retail colocation solutions with a $1.86 billion acquisition of former customer Telx. I have referred to this pivot toward connectivity as “Digital 2.0.” The interconnection business offers steady revenue streams which help to mitigate the lumpiness of larger-scale wholesale deals. During the past two years, US Tier 1 markets have seen an unprecedented acceleration in wholesale leases signed by the largest public cloud service providers and social networks. The size of these deals and the length of the lease terms have both become “super-sized.” The willingness of firms like Microsoft, Oracle, IBM/Softlayer, Google, and Amazon to sign leases for massive data halls in existing powered shells and pre-leases for build-to-suits has been hitherto unseen. Digital has had continued success signing bread-and-butter 1MW-4MW enterprise deals, but landing 10MW-plus customers in US markets has proven to be difficult over the past 18 months. Notably, a company the size of Digital cannot continue to deliver numbers Wall Street expects each quarter without landing some super-wholesale deployments in the largest US markets – including Northern Virginia’s “data center alley.” Source: Digital Realty – DFT merger presentation Adding DuPont Fabros’s deal pipeline, intellectual property around data center design, and operational experience in the hyper-scale arena may well result in “Digital 3.0.” One notable synergy is Digital has ample land in Ashburn, a market where DuPont Fabros’s record leasing success has gobbled up most of its land inventory. Additionally, DuPont Fabros does not develop in Dallas, an active Tier 1 data center market where Digital has a large presence and owns considerable land. Data Center Knowledge coverage on Friday highlighted additional rationale behind the deal: DuPont Fabros Deal Gives Digital Realty More Firepower in the War for Cloud Deals The Terms The deal premium for DFT shareholders was calculated using a $118.02 price for DLR shares and a fixed 0.545 exchange rate for DuPont Fabros common shares, or $64.32 per share. However, over a third of the 15.8 percent premium being paid to DuPont Fabros shareholders evaporated on Friday, due to Digital share price falling to $113.32 on news of the deal. According to Digital management on Friday’s conference call, “The transaction is expected to be roughly 2 percent accretive to core FFO per share in 2018, and roughly 4 percent accretive to 2018 AFFO per share.”  Basically, ~1 percent AFFO from $18 million in expense synergies, ~2 percent estimated from replacing DuPont high-yield debt with Digital investment-grade debt, and one percent from the higher DLR share multiple. A 100 percent stock deal that floats with DLR share valuation seems to be an advantage for Digital at the expense of DuPont Fabros shareholders. There was no cash component to lock-in part of the negotiated premium. However, that does seem to leave a tiny bit of room for a more attractive offer. According to SEC filings, if DuPont Fabros gets a better unsolicited offer under certain conditions, there could be a $150 million break-up fee due to Digital Realty. In a similar fashion, if Digital fails to close, DuPont Fabros could be entitled to a $300 million payment. The universe of companies for whom a 100 percent US wholesale data center business would be a great fit is fairly small, but it does include more than one company. Tokyo-based NTT Communications, parent to US wholesale data center operator RagingWire, is one example of a company that can benefit from such a deal and has the horsepower to do it. Read more: DCK Investor Edge: Why RagingWire is a Data Center Company to Watch However, large multi-national corporations are rarely nimble enough to pull off a deal like this on short notice. This merger was unanimously approved by both Digital and DuPont Fabros boards and is expected to close later this year after shareholder approvals. A bidding war with Digital Realty doesn’t seem likely. Conference Call Takeaways This deal began to take form 90 days ago and accelerated during the past 30 days or so, according to Digital’s chief investment officer Scott Peterson. Notably, DuPont Fabros execs did not participate in the Friday morning call. On the call, Digital pointed to DuPont Fabros management team doing a good job de-risking lease roll-downs, apparently referring to Facebook in three Ashburn data centers (ACC 4, 5, and 6). Facebook is one of DuPont Fabros’s largest clients and also uses Digital realty facilities. DuPont Fabros seems to be cashing out at the top of its game. Digital CEO Bill Stein in response to an analyst said: “Our active development pipeline as of the end of the first quarter is about 60-plus megawatts, roughly 45 percent pre-leased.  And their most recently updated active development pipeline, just call it 79 megawatts, about 48 percent pre-leased.  So, fairly close.” The way I keep score, DuPont Fabros with its much smaller market cap has been hitting it out of the park. Tenant and geographic concentration have always been an investor risk factor for DuPont Fabros shareholders. However, its customer concentration happens to be in investment-grade names like Microsoft, Apple, and Facebook, and geographic concentration risk is actually a prime Ashburn, Virginia, campus location. Arguably, these can be viewed as happy problems. However, Digital Realty’s global footprint helps to balance out what would have been an increasingly large exposure in Northern Virginia for DuPont Fabros. Digital’s investment grade balance sheet makes it easier to fund DuPont’s development pipeline, while delivering higher EBITDA margins. Digital shared a ranking of the Top 20 customers post-merger, on the slide below. It is certainly impressive, with customers 2, 8, and 9 believed to be Microsoft, Apple and Salesforce, respectively. Source: Digital Realty – DFT merger presentation During the Q&A, John Petersen of Jefferies lobbed this grenade: “Now, I know at DFT in the past, a lot of the leases were signed kind of by the executives.  So I’m kind of curious what your thoughts are on maintaining relationships with companies like Facebook and Microsoft, and ensuring that they stay part of the portfolio under a combined company. Bill Stein:  No, I mean, we obviously have a fair amount of business with both those companies and we have relationships throughout the organizations, their organizations and our organizations at multiple levels. So I would expect that that would absolutely continue.  In fact, some of those conversations have already occurred about this deal, and the reception has been quite positive.” Petersen was no doubt referring to DuPont Fabros founder and former CEO Hossein Fateh, currently CEO of Cloud HQ, a wholesale competitor in Northern Virginia, who reportedly has signed Microsoft as a 35MW customer. Investor Takeaway One risk factor for Digital Realty would be the ability to retain key talent after the merger. A relatively small amount of money and stock incentives can go a long way toward solving that problem. However, the largest unanswered question might be the ability for Digital to sign new hyperscale deals with DuPont’s largest cloud customers going forward. Will the goodwill and “excellent customer relations” noted by Stein in his Friday letter addressed to the DFT team continue after this merger is completed? After the proposed merger is consummated there will no longer be a 100 percent pure-play wholesale data center REIT play for investors. Nature abhors a vacuum. So, it remains to be seen if an IPO will materialize to create another such option. Read more: DCK Investor Edge: CyrusOne — Catch Me If You Can The closest remaining publicly traded wholesale option for investors would be CyrusOne (CONE). The success of CyrusOne “punching above its weight class” combined with DuPont Fabros’s hyper-scale leasing success appear to have forced Digital Realty’s hand. Digital has certainly reinforced its position as the only data center landlord offering a full range of space, power’ and connectivity solutions within a global footprint. During his recent REITWeek 2017 presentation, Stein mentioned that non-US scale offerings represented “Bluer Oceans” with less competition. Also during REITWeek, CyrusOne CEO Gary Wojtaszek reiterated his goal of being in Western Europe “by this time next year.” Stay tuned. (Comment on this)
3:30p	Forget Speakers – Big Money Competes in Servers Shira Ovide (Bloomberg Gadfly) — The technology industry is captivated by titans fighting over voice-activated home speakers. The war among Amazon, Google and Apple is technology’s newest frontier, but it’s also pretty small potatoes. People might spend a few billion dollars this year on computer-assisted speakers such as the Amazon Echo, based on forecasts from research firm Parks Associates. The big-ticket fight on the tech frontier is happening not in happy homes bathed in WiFi but in the cold, warehouse-sized buildings that house rows upon rows of computer equipment that function as the invisible locomotive of the internet. About $1 trillion will be spent in 2017 on this and other gear typically purchased by corporations and governments. (Yes, you read that stunning figure correctly.) The world couldn’t function without this hardware, including refrigerator-sized racks of computer servers that are the matched set for each interaction of a digital device. Every time someone asks Amazon Echo to play music or Walmart crunches numbers on its inventory, computer servers somewhere are firing on for those tasks. Most people wouldn’t know a computer server if they saw one. But with the notable exception of transportation, few corners of technology are undergoing more disruptive change with so much money at stake. Sales of servers and other equipment for the world’s digital backbone was a stodgy affair for decades, controlled by stodgy companies such as IBM, Dell and the company now called Hewlett Packard Enterprise. It’s not stodgy anymore. See also: HPE’s Whitman Says Edge Will Drive On-Prem Data Center Demand Amazon, Google and Facebook have helped lead a revolution in how the world’s digital backbone operates. The tech titans still buy equipment by the truckload to stuff into their chilly warehouse-sized computer centers, but they’re shunning the expensive and specialized gear sold by the likes of IBM. Instead, they buy lower cost, made-to-order computer servers from anonymous factories in Asia. Many conventional companies are following their lead. They are reluctant to spent a lot of money on equipment that may become obsolete. Or they are giving up on owning computer gear at all and instead paying to use the digital backbones built by Amazon, Microsoft or Google. All of this is having a profound effect on that $1 trillion yearly market for computer hardware. In the first three months of this year, the anonymous Asian server makers favored by Google and Amazon accounted for 20 percent of the servers sold worldwide, which barely trailed the market share of industry leader Dell, research firm IDC estimates. That’s the equivalent of the store-brand cereal nearly outselling Cheerios. Total revenue from server sales fell in the first quarter and in 2016, and those declines don’t capture all the pain. Sales of pricey and specialized computer equipment are faring even worse. At Hewlett Packard Enterprise, server sales have dropped 13 percent in the last six months. The company pinned most of the blame on a pullback in server purchases by a single large customer — most likely Microsoft. That shows the software giant that was once a reliable buyer of Hewlett Packard Enterprise equipment is now more than likely shopping for computer servers in the store-brand aisle. See also: Meet Microsoft, the New Face of Open Source Data Center Hardware It’s clear the market for computer equipment has changed profoundly. Purchases are becoming concentrated in the hands of a handful of massive companies such as Google and China’s e-commerce king Alibaba. And they are remaking the invisible locomotives of the internet to suit their needs. The $1 trillion market for computing gear will never be the same, and the digital world as we know it would look very different if the once-stodgy state of computer affairs had remained. One example: An early investor in Facebook has said without the transformation of the computer hardware market Mark Zuckerberg’s company might never have existed. We all like to imagine the tech world changes rapidly. But as in most markets with lots of money at stake, change happens slowly and predictions of what’s next take a long time to pan out. (Where are those flying cars, anyway?) But like the collapse in spending on newspaper advertisements or the twilight for photos on film, the destruction in corporate computing hardware is panning out. The only question is how long the purge takes, and which victims will fare the worst. This column does not necessarily reflect the opinion of Bloomberg LP and its owners. Neither does it necessarily reflect the opinion of Data Center Knowledge and Informa. (Comment on this)
6:32p	Shaw Sells Data Center Provider ViaWest to Peak 10 for $1.7B Gerrit De Vynck (Bloomberg) — Shaw Communications Inc. sold its ViaWest data center services business to Peak 10 Holding Corp. for C$2.3 billion ($1.7 billion), three years after the Canadian telecommunications company bought it for C$1.3 billion. ViaWest and Peak 10 combined will be North America’s largest privately held data center company, Shaw said in a statement on Tuesday. The deal frees up cash for Shaw to focus more on expanding its wireless business and competing with Telus Corp., Rogers Communications Inc. and BCE Inc. Shaw rose 4 percent to C$29.80 at 9:43 a.m. in Toronto, its biggest intraday rise in two months. The deal follows other major recent data center sales. Digital Realty announced last week a blockbuster acquisition of DuPont Fabros Technology; Digital Bridge Holdings LLC agreed to buy Vantage Data Centers from Silver Lake Partners for $1 billion in March; and Verizon Communications Inc. agreed to sell its data center business to Equinix Inc. for $3.6 billion last year. Also last year, CenturyLink sold its data center business to a group of investors who later launched a company called Cyxtera using the data center assets. Shaw, based in Calgary, has been re-adjusting its focus to providing home internet, TV and wireless services after selling its media division to Corus Entertainment Inc. and buying Wind Mobile to add wireless to its offerings. Shaw also said Tuesday it would spend C$430 million to buy wireless spectrum form Quebecor Inc., giving it the ability to offer better wireless service in Toronto and major western Canadian cities. “This transaction should allow Shaw to redeploy cash where it is needed: wireless,” Mayer Yaghi, a Montreal-based analyst with Desjardins Securities Inc., said in a note to clients. The deal makes sense because more of ViaWest’s business was in the US and therefore didn’t line up with the rest of Shaw’s operations, he said. Peak 10 is a Charlotte, North Carolina-based data center provider, led by Chris Eldredge, formerly CEO of Telx, which is now part of Digital Realty Trust. The data center and cloud storage market is growing rapidly, creating massive new revenue streams for the world’s dominant internet companies, including Microsoft, Amazon, and Alphabet. Amazon in particular is expanding in Canada, putting pressure on local providers. (Comment on this)
9:15p	Strategies for Enhancing Data Restoration Plans David Zimmerman is CEO of LC Technology.  The key for creating a data recovery strategy is to act proactively. You don’t want to scramble to locate and recover data after a breach/accident/flood, you want to have systems in place that protect your company from data loss. Surprisingly, many companies still argue that they cannot afford a comprehensive disaster recovery plan, despite the massive risks of losing data or not trusting the integrity of the data. The costs of improved malware security, better storage, and access control are exceedingly cheap when compared to the costs of a data breach caused by either internal or external agents. Companies should take a methodical approach to data restoration plans that can limit the exposure to loss: Write a Formal Plan Marketing and sales strategies both ideally run on written plans that detail which people are performing which tasks. Data management should also warrant such a defined and accountable approach. A formal plan is absolutely necessary as it adds transparency to the data collection and storage processes. The plan should function as a roadmap that details the sources of data (CRM, surveys, phone calls, social media) as well as which departments are responsible for that data. The plan should provide a guide for every employee in the business, so they understand how they should access, store, and transmit company information. Planning forces companies to think about data sources, and during that process they might find unsecured data, or information that’s no longer needed and should be discarded. Institute Access Controls and Monitoring As the business grows it becomes more complex, which means a greater number of staff members are accessing systems and there’s greater need for IT consultants, and third-party vendors. Managing the access of all of these people manually is a considerable security risk. Access control and monitoring platforms are necessary for dynamic control over which data can be reached by which people. It provides a layer of protection for the company by deleting access rights for people that leave the company, or for vendor staff when their work is completed. Control can also be exerted over the types of information that are accessible to each worker. Ideally, they will have access to all of the data they need to perform their business functions, but not additional sensitive additional information. Does marketing need access to customer’s financial information? Likely not, so be sure that data access is restricted. Build Multiple Backup Layers To ensure business continuity, companies should create “backups of the backups” by using multiple types of physical and cloud-based storage. External hard drives are very inexpensive, so companies should include them into their recovery plan. To prevent loss due to a natural or manmade disaster such as a flood, earthquake, or fire, firms should have one physical backup that resides offsite. Cloud storage is also cheap, even for firms with large storage needs. The big players such as Amazon and Google offer competitive per-month pricing that can be tailored to fit the needs of any business. A combination of physical and cloud-based storage provides companies with “redundant redundancy” and near-zero risk of business interruption. While public cloud companies have made significant gains in security and reliability, there’s still the recommendation to place the most sensitive data in a single-tenant private cloud. Use Recovery Experts Most large companies encourage staff to save files on either a shared cloud drive or on-premises storage. However, many employees still use their own laptop to store or create data. Or they might use a digital camera as part of their job and have to keep thousands of photos on a SD card. Hard drives and other physical storage media are fragile and can be corrupted if used improperly. If a staff member has a corrupted SD card and desperately needs to recover the information, then the best option is to use specialized recovery software. Staff should be instructed to not use free utilities from the internet to attempt to recover data, as these are often riddled with malware and used by hackers. If recovery is needed, remember the “risk/reward” of the situation, and pay the experts who have the greatest odds of retrieving valuable information. Opinions expressed in the article above do not necessarily reflect the opinions of Data Center Knowledge and Penton. Industry Perspectives is a content channel at Data Center Knowledge highlighting thought leadership in the data center arena. See our guidelines and submission process for information on participating. View previously published Industry Perspectives in our Knowledge Library.     (Comment on this)
9:23p	Equinix to Launch Eight-Story Amsterdam Data Center Next Month The first phase of Equinix’s $190 million, eight-floor data center in Amsterdam Science Park (AM4)—a key interconnection gateway to Europe and the world—will open on July 5, according to a company blog post. This initial buildout of AM4 will provide space for 1,550 cabinets, and upon the completion of four future expansion phases, the 230-foot tall facility will support a total of 4,200 cabinets with a total usable floor area exceeding 124,000 square feet. Read more: Equinix to Build Huge Amsterdam Data Center This is the Silicon Valley-based behemoth’s second data center in that location, one that it claims is within a 50-milisecond network reach of 80 percent of Europe. It would have been the company’s third facility there; however, after Equinix acquired TelecityGroup early last year it was forced by antitrust regulators to sell it to rival and landlord Digital Realty Trust. “Our new data center in Amsterdam is part of Equinix’s efforts to help our customers thrive at the digital edge. Our global colocation and interconnection platform, Platform Equinix, already includes 175-plus facilities in 44 markets on five continents,” said the company. High connectivity makes Amsterdam Science Park an attractive location and cloud hotspot in Europe, which handles around 38 percent of the Dutch data traffic, making it the second-largest data route in the Netherlands. Customers at AM4 will also have direct network connectivity to cloud service providers as well as the AMS-IX and NL-IX exchanges. While an Amazon Web Services Direct Connect node resides in AM3–its existing facility in the Amsterdam Science Park–customers in other Equinix facilities in the city will have access to it through Metro Connect, the Equinix network that links all of its sites in the metro area. Amsterdam is the third European market where Equinix offers direct private access to Amazon’s cloud. (Comment on this)
10:30p	Microsoft Joins Hot Open Source PaaS Project Cloud Foundry The Cloud Foundry Summit Silicon Valley opened in Santa Clara, California, today with announcements by the Cloud Foundry Foundation of a new certification for developers as well as a new member, Microsoft. Several years ago, news of Redmond shelling out bucks to become a card carrying member of an open source project would’ve been heresy. After all, this is a company that spent the better part of two decades doing its best to wipe open source — along with its flagship operating system Linux — off the face of the earth. Times have changed. Now the company openly professes its “love” for all things open. So much so that last year it pledged $500 million yearly to became a top tier Platinum member of the Linux Foundation. The change of heart was caused by the advent of the cloud, which moved “free” Linux and open source from being a major competitor to becoming products contributing greatly to the company’s bottom line. With Azure, the company sells — or more precisely rents — Linux as a service (which I’ll refrain from calling “LaaS”), along with OpenStack, Hadoop, Docker, Kubernetes, MongoDB and all of the other open source applications that are essential to enterprise IT. That list would include Cloud Foundry, a PaaS platform used in both private data centers and in the public cloud to quickly deploy network apps or services. The Cloud Foundry Foundation, which oversees the application’s development, is an independent not-for-profit Linux Foundation Collaborative Project. Microsoft joins the organization as a second-tier gold member, which will cost it $100,000 a year. For its money, it gets to nominate a candidate to possibly fill one of two seats on the foundation’s board of directors and will have a seat on the technology advisory board. This will give Redmond input into the directions future development takes and help assure that its needs for the use of Cloud Foundry with Azure are taken into consideration. This is a bread-and-butter issue for the company, which under CEO Satya Nadella has been betting its future on the cloud. According to Microsoft, one in three VMs on Azure run on Linux and over 60 percent of the images in the Azure Marketplace are Linux-based. That means open source software is resulting in a lot of cash register ka-chinging in Redmond. This also seems to be a part of an overall plan by Microsoft to help build its credibility in open source circles, where until recently (and for obvious reasons) the company’s reputation was less than stellar, and where ill feelings remain in some sectors. In the past year or so, the company has not only been actively participating in important open source projects such as Cloud Foundry and Linux, it’s been releasing some of its crown jewels — like .NET Core — as open source. Mainly through Azure, it’s also entered into strategic partnerships with open source companies such as Canonical, Docker, Pivotal, SUSE, and Red Hat. “Microsoft and the Cloud Foundry community are deeply aligned around our mutual understanding of enterprise business and technical requirements, and our commitment to help organizations modernize their applications without vendor lock-in,” Microsoft’s partner director, Corey Sanders, said in a statement. “By joining the Cloud Foundry Foundation, we will be able to work with members to contribute to foundation initiatives and bring a wider range of solutions to Microsoft Azure for our customers and the community.” Abby Kearns, the Cloud Foundry’s executive director, indicated she thinks Redmond will be a good fit. “Microsoft is widely recognized as one of the most important enterprise technology and cloud providers in the world,” she said. “Cloud Foundry is the most widely deployed cloud application platform in the enterprise, and is used by most Fortune 500 organizations. We share both a tremendous number of users and a common approach to the enterprise cloud.” In addition to welcoming Microsoft aboard the foundation announced that its Cloud Foundry Certified Developer program, originally announced in March and offered through an exclusive partnership with the Linux Foundation, is now publicly available. According to the foundation, since the initial announcement, more than 5,000 have received training through the program. “We knew the need for cloud-native skills was significant, but the response to this program has been explosive,” said Chip Childers, the foundation’s CTO. “After a gradual program rollout over the last couple months — training 5,000 developers on the way — CFCD is now generally available. This product was conceived and developed to solve the demand of developer productivity for the many Fortune 500 organizations using Cloud Foundry.” According to foundation figures, there are currently 250,000 job openings for software developers in the U.S., 500,000 unfilled positions requiring tech skills, and expected growth of more than one million in the next decade. The program was at least partially the result of a report they issued in November revealing a widening gap in cloud skills which threatens enterprises’ ability to embrace digital transformation. To launch the certification program, until June 23 the foundation is offering the Cloud Foundry for Developers course for $1 to anyone who pays full price for the CFCD exam, which works out to be a savings of nearly $500. Full information on the program is available on the Cloud Foundry website. The Cloud Foundry Summit Silicon Valley will run through June 15. (Comment on this)

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