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Colocation: Introduction to Site Selection and

Agreement NegotiationAlan Howard

Sr Research AnalystCloud & Data Center Research Practice

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• Colocation Market Overview

• Site Selection and Assessment

• Agreement Evaluation & Negotiation

• Takeaways

Agenda

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Colocation Market Overview

H5 Data Centers, Phoenix, AZ

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• Very healthy - Cloud & enterprise growth drivers

• Colocation is a Trust & Design Excellence business

• Tier III DC construction $$

• Colo providers ~ $7-8 million/MW

• Enterprises ~ $12–15 million/MW + staff

• Colo operational sophistication greatly improved

• Enterprise adoption of colo is ~20%+ - momentum accelerating

• 80–90% of tenants self-represent

Colocation Industry

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On-premises Data Centers Are Giving Way to Off-prem Services

Source: IHS Markit Colocation Service and Leadership Strategies – North American Enterprise Survey 2018

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Colocation Customers % of Racks in Colocation

40%

49%

58%

0%

20%

40%

60%

Percent of IT racks

Aver

age

Perc

ent o

f IT

Rac

ks

Now20182019

Source: IHS Markit © 2018 IHS Markit

Source: IHS Markit Colocation Service and Leadership Strategies – North American Enterprise Survey 2018

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Colocation Business ModelWholesale Data Center Space

Everything down to and including the PDURetail Data Center Space

Everything down to and including the rack

Retail shared cabinet space

• < 250 kW• Can be subdivided down ½ or ¼ cabinets,

or even 1u• MSA model-avoids RE dept• $275/kW avg.• Power cost included regardless of utilization

Wholesale Suite

• >250 Kw, 60+ cabs• Can be whole building• RE lease model• $130/kW avg.• Power utilized billed separately• PUE cooling uplift charge

Cages - both wholesale and retail

Colo vs. TelcoCarrier neutrality

Network ecosystemsCloud connectivity

Carrier hotelsUnderground DCs

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Colocation Service Providers – More Than You Know

U.S. Big 6 Public Outside U.S. BasedU.S. Based

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Site Selection & Assessment

Flexential, Phoenix, AZ

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• Who are decision drivers and sponsors?

• Will you get the support / time to do it right?

• Are there IT cultural barriers?

• Do you have a real estate department?

• Are you special?

• Scale & Scope?

Internal Risk Mitigation

Do you have adequate capacity planning & criticality data?

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• Request for Information (RFI) – 15/8/4

• Mutual Non-Disclosure Agreement (MNDA) & Request for Proposal (RFP or term sheet)

• Multiple terms, kW options, phased deployment

• x-connects, support fees, move-in timeframe, misc rqmts

• Total Cost of Ownership (TCO) Estimate

• Tours

• Agreement negotiation

Establish a Process

Network service availability and budget in parallel

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Milestone Schedule

Reasonable deadlines for providers, adequate buffer time for your team

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• DC search web sites• Datacentermap.com, datacenters.com, datacenter9.com, datacenterhawk.com,

openspectruminc.com, inflect.com, cloudscene.com, + ~12 more

• DC site selection consultants • Partners National MCF, Kiamehsa, big consulting firms

• Real estate brokers • Colliers, JLL, CBRE, North American Data Centers, Cushman & Wakefield

• Events & internet forums

Colocation Provider Identification

Source: IHS Markit Colocation Service and Leadership Strategies – North American Enterprise Survey 2018

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• Physical location – do you really need to be there? • Core vs Edge

• Accessibility time, proximity to airports

• Natural disaster propensity, hazard proximity

• Tax incentives, taxes & tariffs • Statutory & provider sponsored

• Infrastructure stability/history• Power, water, network/fiber

• Ski resorts or golf courses

Geographic Location

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80% of Colocation Customers Employ Edge

Colocation and cloudremain the primary solution

for edge needs – for now

Company owned micro data centers are gaining in

popularity

18%

54%

53%

39%

68%

77%

19%

37%

41%

50%

60%

74%

0% 20% 40% 60% 80%

No need for data processing proximity

Build additional traditional company-owneddata centers in new locations

Use content delivery networks

Purchase and deploy company-ownedmicro data centers

Use off-premises cloud services

Use colocation services

Percent of Respondents

Prox

imity

Str

ateg

y

2019Now

How are you addressing data processing proximity requirements?

Source: IHS Markit Colocation Service and Leadership Strategies – North American Enterprise Survey 2018

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• Network services, cloud connectivity• Remote hands & eyes or break/fix• Hosting or cloud• Managed services/MSPs on site• Office space • Monitoring/DCIM customer dashboards• Open Compute Project (OCP) compatible

Services Availability

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Colocation Adoption Drivers

47%

49%

53%

57%

59%

61%

66%

67%

68%

75%

0% 20% 40% 60% 80%

Access to renewableenergy choices

Tax incentives

Reduction of datacenter staff workload

Geographic proximity toend users or devices

Ability to directly connectwith partners or customers

Reduction ofcapital investment

Ability to directly connectwith cloud service providers

Decreased operational costs

Speed of deployment ofnew data center space

Improved applicationperformance

Percent of Respondents Rating “Strong Driver”

Driv

ers

Source: IHS Markit © 2018 IHS Markit

Decision drivers to adopt colocation services

Source: IHS Markit Colocation Service and Leadership Strategies – North American Enterprise Survey 2018

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Colocation Selection Criteria

8.2

8.1

7.2

7.1

6.9

6.8

6.5

6.4

5.9

5.8

5.6

3.5

0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0

Global footprint

Availability of renewableenergy choices

Power density capability

Direct connections tocloud service providers

Power usageeffectiveness (PUE)

Financial stability

Number of connectivityproviders available

Solution breadth

Reputation

Pricing structure

Service and support

Security

Average Rank

Crit

eria

© 2018 IHS MarkitSource: IHS Markit

Most important criteria for choosing a colocation provider (mean rank,1 most important)

Source: IHS Markit Colocation Service and Leadership Strategies – North American Enterprise Survey 2018

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• Financial stability / litigation threats• Reputation – start asking now• Site owned vs leased • Renewables / sustainability• Support protocols – online vs phone• Geographic footprint• Corporate level security standards & function

Provider Evaluation

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• Meets established requirements

• Acquire one-line and supporting documentation • Tier level, SPOF analysis, dual POEs/MMRs, diverse routes

• Maintenance protocols & schedules

• PUE w/supporting evidence

• Physical / network security standards and technology

• Room to expand - ROFR (right of first refusal)

Site Evaluation - Pre-tour

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Data Center Site Tour ChecklistTHIS SLIDE INTENTIONALLY LEFT UNREADABLE

Invite an engineer

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Agreement Evaluation & Negotiation

Aligned Energy Data Center, Phoenix, AZ

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• Agreements are not written for you

• Most proposals are different formats / calculations

• Real Estate lease vs MSAs • Capital vs operating leases

• SLAs typically have no teeth

• Fee escalators

• Flexibility good – to be negotiated

• Ambiguity bad – “prevailing market rates”

Agreement Evaluation

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TCO EstimateTHIS SLIDE INTENTIONALLY LEFT UNREADABLE

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TCO Estimate (left half)

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TCO Estimate (right half)

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• 2+ term quotes - longer = cheaper • Retail 2–3 year term = 5–7 years occupancy

• Wholesale 5–7 year term = 10–12 year occupancy

• $/kW not the whole story - lowball

• Limits on fees - escalators

• Not just about price

• Somebody may get paid a fee

• Negotiation is deal & provider size dependent

Not asking is not getting

Agreement Negotiation

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• Expansion option to move entire footprint within the facility*

• Client should have the right to withhold disputed funds*

• Contract assignment section needs to be mutual

• Option to renew at existing rates for one or more years

• Provider press release only upon written approval of client

• First three month free from installation of first cabinet*

• Option to amortize NRC over the term*

Agreement Adjustment Request Examples (1 of 2)

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• Credit for each SLA applicable service in any 24-hour period*

• All costs should be fixed during the term

• Provider right to terminate in 10 days, change to 60 days*

• Provider right to relocate customer - only with client approval

• Termination, indemnity, and limits to include mutual language

• Maximum credits & termination option states 3 events in 1 month –change to 3 events in 1 year*

Agreement Adjustment Request Examples (2 of 2)

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Takeaways

Perform your own thorough due diligence

Know the industry and engage your peers Let data drive decisions

Manage your risk and exposure

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Thank You. Questions?

Alan HowardSenior Research Analyst

Cloud & Data Center Research Practice+1 408.583.3385

Alan.Howard@ihsmarkit.com