In 1983, Warren Buffett drafted a set of business principles, and in 1996 he published them as an Owner's Manual in Berkshire Hathaway's annual report. In January 2014, with respect and deference to Buffett, I published an Owner's Manual for Zayo's investors. Bandwidth reprinted it as its first appendix.
This one is shorter, and it is written for a different reader: anyone who owns, lends to, builds or rents a data center as the second cycle in this book plays out. The principles come from the stories in the chapters. Most of them have played out more than once.
Principle 1: Cash Flow is King#
Buffett defines the value of a business as the cash it will produce "between now and doomsday." Revenue growth, backlog, square feet and megawatts are all ways of guessing at that number, and none of them is the number. In the year Lehman Brothers failed, Equinix grew its revenue 68 percent and earned a profit, while DuPont Fabros, still building on borrowed money, halted construction.
Principle 2: Never mistake a forecast for a lease#
A forecast is somebody's opinion of demand. A lease is a customer's promise to pay. Exodus went public on Forrester's forecast that hosting would grow eighty-fold in five years; Digital Realty went public six years later, at the same $12 a share as Equinix, on buildings that were 87.1 percent leased.
Principle 3: Separate the building from the borrowing#
A data center can be full and still sink the company that owns it. Value the building and the balance sheet separately, and ask which one the debt depends on. Globix said its centers were 95 percent full in June 2001, and seven months later it was headed for bankruptcy with a Market Value under $6 million.
Principle 4: Own the place where everyone meets#
A network can be duplicated by anyone with a bigger budget. A meeting place gets more valuable with every tenant who moves in, and a competitor can't copy the tenants. At MFS we thought we were selling roads, and the intersection we built at MAE-East turned out to be the prize; Equinix built a company worth about $100 billion on the same idea.
Principle 5: Know which customers can build without you#
A landlord whose tenants can build their own buildings has to earn the renewal every time. When the biggest customers know your costs to the dollar, your pricing power lasts only as long as they can't build fast enough. Facebook published the designs for its Prineville building, and one of its engineers explained why giving them away cost nothing: "We don't hold this technology as a key to our business."
Principle 6: Don't build on borrowed money when the cost of money turns#
Capital-hungry builders are always one rate increase or one frozen credit market away from stopping. In 1969, University Computing blamed its missed forecast on "curtailed expansion of the company's computer network facilities, due to high interest rates"; in 2008, DuPont Fabros halted construction because the banks it had been talking to "merged or disappeared."
Principle 7: Ask who is paying the payer#
A contract is only as good as the customer's ability to pay, and some customers pay with money they raised a few months earlier. When suppliers invest in their own customers, follow the money around the circle before you count the revenue. Anthropic disclosed about $895.4 billion of committed spending on computing, and part of every backlog reported by its suppliers is the other side of that page.
Principle 8: Secure the power before you pour the concrete#
A building without power is an empty shell, and power arrives on the utility's schedule. In 2001, PG&E told Qwest it couldn't power a Sunnyvale data center until 2002; by 2026, PJM had come up short of reliable capacity in three auctions in a row, and the median power project took 61 months to connect to the grid.
Principle 9: The neighbors get a vote#
A data center needs its community's consent, even when it never asks. Pay your own way on power and water, and say so in public before someone else says otherwise. On November 3, 2026, voters rejected data centers in 40 of 41 local ballot measures, and even Loudoun County, which collected nearly $1.2 billion of revenue from them, had already ended by-right approvals.
Principle 10: Measure the thing itself#
Every Boom has a number that everyone quotes and nobody checks. Find the person measuring actual use, and listen when the measurement disagrees with the forecast. In 1998, Andrew Odlyzko showed that Internet traffic was doubling about once a year, not every hundred days, and his inconvenient truth was ignored by the people raising money on the myth.
Principle 11: Buy the building after the Bust#
The best trades in this book were made by buyers with cash and patience who walked through the wreckage. Pay for what lasts, and let someone else pay for the party. Equinix bought the inside of a finished San Jose data center for about $900,000, and GI Partners turned $280 million of equity in unwanted buildings into more than $1 billion.
Principle 12: Be candid, especially when the news is bad#
Investors, lenders and neighbors are owners too, and they deserve the same information management uses to run the business. Triumphs get trumpeted; mistakes deserve the same airtime. At the top of the hosting Boom, Level 3's Jimmy Byrd warned in the Wall Street Journal that too many data centers were coming online at once, and the record shows he was right.