Industry Insights | The data center service industry is experiencing rapid development, with huge market potential for retail third-party neutral data centers

In recent years, the four major markets driving the development of the data center industry are emerging disruptive technology industries, emerging consumer model segments, e-commerce, fintech, and the sub-sectors of the pan-entertainment industry.

Disruptive technologies such as the Internet of Things (IoT), artificial intelligence, big data, 5G technology, and AR/VR technology are experiencing increasing demand for data due to the continuous policy support from governments, the rapid development of emerging technology and internet companies.

The market scale of the new consumption model represented by online healthcare is growing rapidly due to mobile and networked living habits, as well as the evolving development environment of cloud computing technology. This has led to an increasing dependence on the internet, and the e-commerce market has also shown a continuous growth trend. Therefore, in the future, the demand for third-party data centers in related fields will also be higher.

Benefiting from the continuous release of demand for transformation and upgrading by traditional financial institutions, the optimization and upgrading of key technologies in the fintech industry, as well as a series of supportive policies, the revenue scale of fintech is expected to further grow, driving demand for data processing, exchange, and management.

The sub-sectors of the pan-entertainment industry represented by gaming and live streaming are popular among the public due to their diverse content and low acquisition barriers. Their demographic dividend and favorable commercial monetization models make them highly demand data.

An Internet Data Center (IDC) refers to a computer room used for storing networked computers, storage devices, and related network equipment, mainly used for organizing, processing, storing, and transmitting massive amounts of data. Its services include two modes: host hosting (solely leasing IDC space, racks, or empty racks that provide basic power, cooling, and bandwidth) and managed services (providing basic services in addition to rented servers, such as monitoring and system restarts).

The data center industry can be divided into three categories based on operational models: third-party neutral data centers, operator-owned data centers, and enterprise self-built data centers.

Source: Frost & Sullivan

The data center industry in China has gradually developed from its infancy in 1960 to the current stage of transformation and upgrading.

Source: Frost & Sullivan

The industrial chain of the data center industry is mainly divided into upstream resource providers, midstream data center service providers, and downstream enterprise users.

Source: Frost & Sullivan

The core advantage of third-party neutral data centers lies in maintaining network neutrality, allowing them to interconnect with networks operated by multiple network service providers and internet service providers. Compared to operator data centers, multiple network connections can better help data center service providers meet customized customer needs and respond more quickly to market demand changes.

Third-party neutral data centers rent fiber resources from telecom operators to meet their bandwidth needs. Third-party neutral data centers also purchase network access from multiple telecom operators to improve their network efficiency.

Source: Frost & Sullivan

In recent years,The market share of telecom operators' data centers is gradually being squeezed by third-party neutral data centers:

On the one hand, for telecom operators, data centers are not their core business.It accounts for only a small portion of the total revenue of China's three major operators. Data centers are mainly used to support their core network broadband services.

On the other hand, China's telecom operators mainly rely on the group headquarters to decide the location and construction scale of new data centers, which leads to a slow response to market changes, an imbalance between supply and demand, and a mismatch with market demand.Meanwhile, the industry is facing pressure from reduced carbon emissions. As energy costs rise, inefficient data centers are becoming a burden for telecom operators.

In addition, telecom operators adopt a unified management approach to provide customers with standardized products.Their business model and development characteristics make it difficult for them to be as flexible and professional as third-party neutral data centers in the field of data center services. At the same time, data centers operated by telecom operators usually only provide their own network access, and therefore are often limited by their network coverage.

For third-party neutral data centers, they will focus on improving their services and expertise, security, reliability and functionality, reputation and brand awareness, as well as financial strength. In addition, third-party neutral data centers can provide multi-interface network access to meet customers' personalized needs and respond more quickly to market demands.

Globally, many telecom operators have been selling off their data centers rather than investing in them, as data center solution providers and technology giants have started to roll out new generations of larger, more efficient data centers.

Market scale of China's data center service industry

( segmented by operator and third-party neutrality), 2016-2025 forecast

Unit: One billion RMB

Source: Frost & Sullivan

The development of the cloud computing industry has brought about fundamental changes to the market landscape of IT infrastructure in China. The massive demand from Chinese cloud service providers will become a key driving factor for the market of data center services in China.For example, cloud service providers such as Alibaba Cloud, Tencent Cloud, Huawei Cloud, and Microsoft Azure have become major customers of data center services. As more traditional IT services are migrated to the cloud, the scale of cloud computing will further expand, leading to an even greater demand for data center services.

The development of third-party neutral data center service providers towards becoming full-stack solution providers has become an important trend.Currently, transforming into a data center service provider that can offer one-stop, multi-level solutions and comprehensive value-added services has become a strategic focus for data center service providers. This has also become an important way to diversify revenue sources. Specifically, since the data center industry is closely linked with the cloud computing industry and they are upstream and downstream industries of each other, some cloud computing-related value-added services, such as hybrid cloud architecture products, bare metal cloud services, IaaS (Infrastructure as a Service), PaaS (Platform as a Service), SaaS (Software as a Service), and other cloud services, can be combined with third-party neutral data center services to form integrated solutions and expand market breadth.

According to different business models, third-party neutral data center services can be divided into two types: retail and wholesale.

Source: Frost & Sullivan

• Retail-oriented third-party neutral data center

It mainly provides small-batch standardized cabinets for customers, accommodates multiple customers within a single data center, or offers managed cabinets for specific types of enterprise customers within a single data center.Most of the customers of retail third-party neutral data center service providers are small and medium-sized enterprises, which usually have high requirements for data center delivery time and business resilience. Typically, customers purchase on demand based on their actual business needs and sign contracts ranging from one to three years with retail third-party neutral data center service providers. At the same time, customers have high demands for value-added services such as network access CDN (Content Delivery Network).

• Wholesale third-party neutral data center

The main customer group consists of large enterprises with high requirements for customized data center services.Based on the target customer needs, wholesale third-party neutral data center service providers offer customers large-capacity, modular space, and a complete set of services.Compared to the standardized products and services provided by retail third-party neutral data center service providers, wholesale third-party neutral data center customers typically participate in the early stages of data center site selection and design to ensure they meet their usage requirements. Generally, customers sign long-term contracts with wholesale third-party neutral data center service providers that last for more than five years.

Market scale of China's third-party neutral data center service industry

( segmented by retail and wholesale), forecast for 2016 - 2025

Unit: One billion RMB

Source: Frost & Sullivan

The retail and wholesale data center service industries have both experienced high growth rates in the past few years. During the period from 2016 to 2020, the retail data center service market size averaged a compound growth rate of 18.4%, increasing from 11.3 billion in 2016 to 22.2 billion in 2020. The wholesale data center service market size averaged a compound growth rate of 28.1%, increasing from 6.5 billion in 2016 to 17.5 billion in 2020.Currently, the market size of retail data centers is still larger than that of wholesale data centers.

• Government favorable policies

The Chinese government has taken multiple measures to promote the healthy development of the data center industry. In March 2020, the Chinese government announced that it would accelerate the construction of new large-scale high-quality data centers and 5G network infrastructure, as well as the industrial Internet, intercity transportation and urban rail transit systems. Ultra-high voltage and new energy vehicle charging stations are among the six key investment areas—part of the 'New Infrastructure' initiative—to promote sustainable growth and transform China into a digital economy.

In May 2020, the Draft National Economic and Social Development Plan for 2020 submitted by the National Development and Reform Commission proposed a plan to implement large-scale data center construction projects nationwide, and outlined about 10 regional data center clusters and intelligent computing centers.

• More enterprises choose IT outsourcing

In the past few years, most Chinese enterprises have chosen to deploy IT infrastructure internally and keep their data center capacity within their own premises. However,As new technologies and applications make IT needs increasingly complex, more and more enterprises are considering or choosing to outsource their data center needs and services.It is expected that the total market for IT outsourcing services in China will grow at a compound annual rate of 4.9%, from 275 billion yuan in 2019 to 349.8 billion yuan in 2024.Meanwhile, enterprises are seeking flexible methods to control IT-related costs, making third-party neutral data center service providers increasingly attractive.

• Multi-industries achieve the transformation from offline to online

The Chinese online e-commerce market features various innovative business models such as live e-commerce, leading to a surge in demand for data usage, storage, and analysis. This has driven the growth of the retail data center market.In addition, due to the outbreak of the COVID-19 pandemic, more and more traditional offline activities are shifting online, such as online healthcare and online meetings.

With the increasing popularity of online activities, more frequent and extensive online activities will require a large amount of bandwidth, data storage, and other internet resources.theseThe popularity and data intensity of applications and companies will continue to rise, and they are expected to become the main demand driver for the retail data center market in third-party neutral data centers..

• Information technology transformation needs of small and medium-sized enterprises

The state has continuously introduced policies to encourage small and medium-sized enterprises (SMEs) to carry out informatization reforms, applying modern technologies in multiple aspects such as R&D design and production manufacturing to improve production efficiency. Under the guidance of these policies, many enterprises have embarked on informatization transformation to enhance their overall strength.

Through digital upgrading, small and medium-sized enterprises can transition from traditional hierarchical management to centralized management, which not only reduces costs but also improves management efficiency. As small and medium-sized enterprises increasingly demand digital upgrading, data centers can provide them with data storage and other services. This has led to a growing demand for data center performance among small and medium-sized enterprises, accelerating the development process of the data center industry.

• The emergence of full-stack solution service providers

Data center service providers will continue to increase investment in new technology-related products and services, striving to support the rapid changes in enterprise business at a deeper level.Data center service providers are emerging continuously, offering powerful capabilities to provide one-stop, multi-layered solutions and comprehensive value-added service suites. This has also become a strategic focus for data center service providers, serving as a means to diversify revenue sources and strengthen customer relationships.

• The high cost-effectiveness brought about by the joint collaboration between internet leading enterprises and cloud service providers

Due to the strong growth of China's digital economy and cloud services, demand for data centers with high power density cabinets and centralized and modular data center infrastructures has greatly increased, supporting various specifications of internet leaders and cloud service providers.

• Increasing operational and maintenance capabilities

As the scale and number of data centers increase, the operational and management difficulties of data centers become more and more challenging.This has led to an increasing demand for efficient operation and maintenance management talents among data center service providers. In the future, the requirements for operation and maintenance capabilities will be even higher, thereby achieving the needs for high efficiency and fast response.

Moreover, customers' demand for Ops is no longer limited to routine operations. For highly customized VIP customers, one-on-one dedicated Ops are more attractive. A dedicated senior Ops team is provided immediately to provide rapid response and feedback, simplifying business processes. Monthly, quarterly, and annual reports are offered to achieve efficient, high-quality, streamlined, and regular Ops management.

• Data centers will shift from first-tier cities to non-first-tier cities.

Large enterprises require data centers located within major cities to enhance connectivity and reduce initial latency. Due to the Chinese government's implementation of PUE (Power Usage Efficiency) limits on the construction of new data centers in first-tier cities, and limited and expensive land and power resources, many local governments in areas surrounding first-tier cities actively support data center projects by providing preferential policies in terms of land use rights and electricity costs, in order to support local economies and labor markets.Therefore, the trend of data center site selection is shifting from the core areas of first-tier cities to their suburbs, and then continuing to spread to non-first-tier cities.

• Transforming towards green data centers

The IT critical equipment in data centers needs to operate around the clock, and such equipment consumes a huge amount of energy.National policies advocate for energy conservation and emission reduction, and local governments have successively introduced relevant policies for the greening construction of data centers, promoting the green development and transformation of their service providers.Leading enterprises in the industry have also focused on energy conservation and emission reduction, implementing refined management of technology research and development: reducing data center energy consumption and achieving the construction of sustainable and green data centers.

• Customer service content is becoming more comprehensive and efficient.

Customers are placing increasing emphasis on service experience, and data center service providers are gradually increasing their focus on customer service. With the increasing importance of customer service, data center service providers are becoming more comprehensive in covering standard services (such as installation and commissioning, authorized operations, and comprehensive wiring). This includes everything from operation and equipment installation to power and data cabling, on-site support, and even express delivery services for the data center. They enhance the customer service experience from different dimensions to meet customer needs. Moreover, while providing comprehensive services to customers, they need to ensure efficient completion of each link, saving time and capital costs.

• Value-added services

In recent years, as a core business of retail third-party neutral data centers, cabinet hosting services have developed relatively stably overall and their technology has become more mature.Customer needs are no longer satisfied with single cabinet hosting services, but are moving towards a variety of value-added services related to data centers.

To meet the diverse needs of customers, retail third-party neutral data center providers, especially leading enterprises in the industry, have begun to deploy different value-added service businesses. By integrating emerging technologies and data platforms, they offer customized, secure, reliable, convenient, fast, and cost-effective value-added services such as network products, hybrid cloud products, bare metal cloud services, operations management, etc. These will become one of the main trends in the future development of the industry.

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