At 2 a.m. on August 24, 2006, Amazon opened a test of something it called the Elastic Compute Cloud. Within about five hours, every test slot had been claimed.The test was a limited beta. Amazon's own announcement is dated August 24, 2006. Some secondary timelines give August 25, probably the next day's news cycle. A Slashdot item the same day said the beta appeared to be limited to existing S3 users and was "already full."
The people who grabbed those slots weren't renting a cage in Santa Clara or a rack in Ashburn. They weren't signing a three-year contract, buying servers or waiting on a utility to deliver power. They were renting a computer from an online bookstore, by the hour, on a credit card. BusinessWeek put the price at about 10 cents per server-hour.
Wall Street wasn't impressed. Amazon was spending heavily on technology, and analysts couldn't see when the spending would pay off. In November, BusinessWeek ran its cover story under the headline "Jeff Bezos' Risky Bet."
The bet would change the data-center business more than anything since the Bust. Over the next ten years, the cloud created the largest customers the industry had ever seen: Amazon, Google, Microsoft and Facebook. Those customers then discovered they could build their own buildings, and they started doing it in places nobody in the hosting business had ever heard of: a river town in Oregon, a potato town in Washington, a county seat in Oregon whose whole electric load was smaller than one building. What they didn't build, they leased by the tens of megawatts, much of it in one county in Northern Virginia. A new breed of developer grew up to serve them, built huge buildings on spec and took them public as real-estate investment trusts. And a fiber company in Boulder, Colorado, decided it should own some buildings too.
When we last left the data-center business, the Phoenix had risen. Equinix, Digital Realty and the survivors had bought the Bust's empty floors at pennies on the dollar and filled them with tenants. Now the tenants were about to change, and so was the balance of power between the people who own the buildings and the people who fill them.
Amazon Web Services—Andy Jassy#
Andy Jassy's job at Amazon in the early 2000s was to follow Jeff Bezos around. He was the chief of staff, and from that seat he noticed something odd. Every time an Amazon team started a new project, it rebuilt the same infrastructure from scratch.
In 2003, at an executive retreat at Bezos's house, the leadership team sat down for what was supposed to be a thirty-minute exercise on Amazon's core competencies. It ran long. By that summer, the idea had become a plan to build an "operating system" for the Internet that outsiders could rent. "In retrospect it seems fairly obvious," Jassy said in 2016, "but at the time I don't think we had ever really internalized that."Jassy's account comes from a 2016 retrospective in TechCrunch, not a period source. The BusinessWeek cover story of 2006 doesn't mention him.
The first product was storage. On March 14, 2006, Amazon announced the Simple Storage Service, S3, with Jassy identified as vice president of Amazon Web Services. The pricing fit on a napkin: 15 cents per gigabyte per month to store data and 20 cents per gigabyte to move it. No minimum fee. Objects could be as small as one byte or as large as five gigabytes, and you could store as many as you liked. "Amazon S3 enables developers to focus on innovating with data, rather than figuring out how to store it," Jassy said in the press release.
Five months later came EC2, the rentable computer. Amazon's announcement was a short post with no prices in it, but one sentence captured the whole business model: "Amazon EC2 changes the economics of computing by allowing you to pay only for capacity that you actually use."
I have read that sentence many times, and every time I hear an echo. In Chapter I, Tymshare and its competitors rented time on a mainframe to customers who couldn't justify buying one. You dialed in, you computed, you paid for the minutes. Then the PC arrived, and everyone decided they'd never rent a computer again. Forty years later, an online retailer was renting computers by the hour to customers who didn't want to own one.
The glass house was back again. This time you could rent it with a credit card.
The Risky Bet
BusinessWeek's cover story that November laid out both sides of the argument. On the bull side were the early customers. SmugMug, a photo-sharing site, said S3 was saving it about $500,000 a year. Powerset, a search startup, expected to cut its first-year capital costs by more than half against a hardware budget of more than $1 million. SmugMug's Chris MacAskill had become a true believer: "Everything we can get Amazon to do, we will get Amazon to do."
On the skeptic side was Amazon's income statement. Spending on technology and content had risen 52 percent to $485 million, and analysts saw no near-term return. Why was a retailer with thin margins pouring money into servers for other people's startups?
Bezos didn't promise much. "We think it's going to be a very meaningful business for us one day," he told the magazine.
He was underselling it. By 2016, ten years after the S3 launch, AWS was running at about $10 billion of revenue a year. Jassy, looking back, sounded almost as surprised as the analysts: "I don't think any of us had the audacity to predict it would grow as big or as fast as it has."
Why It Mattered to the Buildings
For the data-center business, AWS changed who the customer was. In the hosting Gold Rush, the customer was a dot-com that rented a cage from Exodus and filled it with its own servers. In the Phoenix years, the customer was an enterprise or a carrier that leased space and power from Equinix or Digital Realty. Every one of those customers was small, and there were thousands of them.
AWS turned many of those small customers into one big one. SmugMug didn't need a cage anymore. Amazon needed the buildings instead, and Amazon would need them by the dozen. The same was about to be true of Google, Microsoft and Facebook. The customers who used to rent space were starting to rent computers, and the companies renting out the computers were becoming some of the biggest buyers of data-center space anywhere.
In Bandwidth, I speculated that one of the Big Tech companies might someday decide that owning a national fiber network was a strategic addition to its cloud, "not unlike Amazon's AWS play." That's how big a shadow AWS casts over infrastructure. A business that started as a way to stop Amazon's own engineers from reinventing the wheel became the template for how every piece of digital infrastructure gets valued.
Google, Microsoft, Yahoo and Facebook—Building Their Own#
Two months before EC2 opened its doors, John Markoff and Saul Hansell of the New York Times went to The Dalles, Oregon, a town on the Columbia River about 80 miles east of Portland. In June 2006, they reported on what Google was building there under the code name "Project 02."
The complex was about the size of two football fields, with twin cooling plants four stories tall. Google held a permit for a third building. The town's city attorney and city manager had signed confidentiality agreements with the company, so they couldn't say much. The newspaper ran the story under the headline "Hiding in Plain Sight, Google Seeks More Power."
Why The Dalles? Two reasons, and both should sound familiar to anyone who read Bandwidth. The first was cheap hydropower from the Columbia River dams. The second was surplus fiber left over from the dot-com bust. The overbuilt networks of the Boom were finally finding a use, and the use was a search engine's computer room in a town most Americans couldn't find on a map.
The land was cheap too. In February 2005, a company called Design LLC, buying for Google, paid $1.87 million for 30.19 acres in the Port of The Dalles's industrial park, with an option on 80 more.The 2005 purchase is known to me only from an excerpt of a GlobeSt report ("Google buying 30 acres on Columbia River," February 18, 2005), and the 2016 Oregonian story only from an excerpt of its reprint in the Spokesman-Review. I haven't found The Oregonian's 2005 coverage. The port expected 50 to 100 jobs. Eleven years later, The Oregonian reported that Google had bought the site of the old Northwest Aluminum smelter and that the port's industrial land was nearly gone. On the Columbia, the servers had replaced the smelters.
Danny Hillis, the computer scientist, gave the Times its best line: "Google has constructed the biggest computer in the world, and it's a hidden asset."The same New York Times article offered a "best guess" that Google had "more than 450,000 servers spread in at least 25 locations around the world." Google's tax deal with Wasco County and the city of The Dalles, two fifteen-year agreements, the first signed in 2005, is known only from search snippets of later coverage. When the exemptions ran out about fifteen years later, Google reportedly received a $5.2 million tax bill on a facility the county valued at $335 million.
I had my own reason to notice. In 2006, I was recovering from double hip-replacement surgery after leaving ICG, and I passed the long days by calling the CEOs of fiber companies. The premise for Zayo came out of those calls. As I wrote in Bandwidth, the first plank was that the Insatiable Demand for Bandwidth would hold for generations, and the most visible proof was "the daily widespread use of the Google search engine and Google Maps, the monumental adoption of streaming, and the continued expansion of cloud services and data centers." The second was that the fiber business had Too Many Fiber Providers, not too much fiber. Google's building on the Columbia was the first plank in concrete. Somebody had to connect it.
The Times also noticed who was chasing Google. About 130 miles north, Microsoft and Yahoo were building in Wenatchee and Quincy, Washington. "But it is a race in which they are playing catch-up," the reporters wrote.
Potato Country
Three months earlier, in March 2006, the Associated Press had visited Quincy and found a farm town of about 5,300 people that was about to get very rich. Microsoft had a tentative deal for 74 acres in an industrial park at about $1 million. Yahoo had a tentative deal for 50 acres at about $500,000, plus a roughly $6 million, ten-year lease in nearby Wenatchee. The two companies could roughly double Quincy's tax base of about $800 million.
The locals were thrilled. "This could be a real boon to Quincy and to Grant County," said Curt Morris of the Port of Quincy. The city administrator, Tim Snead, was even happier: "It's been a quiet little town for many, many years, but it's going to be very exciting."
It got exciting. Six years later, in September 2012, James Glanz of the New York Times went back to Quincy for a series called "The Cloud Factories." The headline was "Data Barns in a Farm Town, Gobbling Power and Flexing Muscle."
The numbers told the story. Microsoft had bought about 75 acres of former bean fields and asked for a 48-megawatt substation. Together, Microsoft and Yahoo drew 41.8 megawatts. All the residential and small commercial accounts combined averaged 9.5 megawatts. The companies were paying 2.5 to 3.8 cents a kilowatt-hour, against a national industrial average of 6 to 7 cents.
Then came the part nobody in Quincy had imagined in 2006. Under its power contract, Microsoft faced a $210,000 penalty because its actual use didn't match its estimate.The source summary I worked from describes the penalty as being for "underestimating" Microsoft's use, but the rest of the account, in which Microsoft raised its consumption to shrink the penalty and called that "unnecessarily wasteful," implies that actual use fell short of the estimate. Glanz's own text has it both ways: the penalty was "for underestimating its power use," and Microsoft was being penalized "for using too little power." To shrink the penalty, Microsoft raised its consumption by 5 to 7 megawatts, burning power it didn't need. Microsoft itself called the episode "unnecessarily wasteful." The utility board waived all but $60,000 of the penalty. Yahoo paid its own penalty, $94,608, in full. Glanz also found that Microsoft's backup diesel generators had run 3,615 hours in 2010. Yahoo's ran 65.
Microsoft's spokeswoman called it "a one-time event that was quickly resolved." Fair enough. But the episode captured something that would matter a great deal by the end of this book. The new cloud customers were so big that a single company's rounding error was several times the load of a whole town. And the town's leverage over the company was about $150,000 of waived penalties.
Washington Notices
Quincy wasn't the only place counting megawatts. On December 20, 2006, four months after EC2 opened, Public Law 109-431 was signed. The short statute directed the Environmental Protection Agency to report on "the rapid growth and energy consumption of computer data centers." For the first time, Congress had formally noticed the buildings.
EPA delivered its Report to Congress on August 2, 2007. In 2006, it found, the country's data centers had used about 61 billion kilowatt-hours, 1.5 percent of all U.S. electricity, at a cost of about $4.5 billion. That was "more than the electricity consumed by the nation's color televisions," and about as much as 5.8 million households. Peak demand was about 7 gigawatts, "equivalent to the output of about 15 baseload power plants." Use had more than doubled since 2000, and about half of it went to power and cooling equipment, not to the computers.
Then EPA made a forecast. Under current trends, it said, data-center use "could nearly double again" by 2011, to more than 100 billion kilowatt-hours a year and $7.4 billion, with peak demand rising to 12 gigawatts. That was about ten more power plants. Best practices, the agency added, could cut that 2011 figure by up to 45 percent.
Hold on to that forecast. We'll check it at the end of the chapter, and again at the end of the book.
Opening the Blueprints
Facebook came late to building, and when it did, it gave the blueprints away.
Facebook started out as a tenant. As we'll see shortly, one of its landlords was DuPont Fabros in Ashburn. Then it built its own, in Prineville, Oregon, in Crook County. Construction started in early 2010, and the building began operating in April 2011. Phase one cost $210 million, covered 300,000 square feet and drew 28 megawatts. All the other homes and businesses in Crook County combined used about 30 megawatts. The campus could eventually reach about 78 megawatts. The site employed fifty-five people at an average salary of $47,200.Square-footage figures for Prineville vary by source: 147,000 (planned), 150,000, 300,000 and 330,000. The 300,000 figure is from Data Center Knowledge's January 2012 report on the $210 million phase one. The exact opening day in April 2011 is unconfirmed.
On April 7, 2011, Facebook did something none of the other giants had done. It published the designs of the Prineville building and the servers inside it, including the power supplies and the battery backup, and called the effort the Open Compute Project. AMD, Dell, HP and Intel had helped develop the technology. Dell and Synnex would build and sell hardware to the specification.
The efficiency numbers explained why Facebook bothered. Prineville used 38 percent less energy to do the same work as Facebook's earlier facilities and cost 24 percent less to build. Its power usage effectiveness, the industry's measure of how much electricity goes to overhead rather than computing, was 1.07, against 1.5 in its existing facilities.Power usage effectiveness (PUE) is the total power a data center draws divided by the power its computers use. A PUE of 1.5 means half a watt of overhead, mostly cooling, for every watt of computing. A PUE of 1.07 means seven-hundredths of a watt. For comparison, the Uptime Institute's surveys put the industry average at about 2.5 in 2007, 1.98 in 2011, 1.58 in 2018 and 1.54 in 2025. I have seen those figures only in excerpts of Uptime's reports.
Jonathan Heiliger, Facebook's vice president of technical operations, made the pitch: "We think it's time to demystify the biggest capital expense of an online business — the infrastructure." Mark Zuckerberg added, "We're not the only ones who need the kind of hardware we're building out." And Amir Michael, one of the hardware engineers, explained why giving it away cost Facebook nothing: "We don't hold this technology as a key to our business."
Think about that last line. To the hosting companies of 1999, the building was the business. The palm scanners, the cooling, the generators: that was what Exodus sold. To Facebook in 2011, the building was a cost center to be engineered down and then shared, so that suppliers would make the parts cheaper for everyone. When your biggest potential customer tells you your product isn't a competitive advantage, you should pay attention.
The Cloud Buys the Carrier Hotel
The giants didn't only build in farm towns. In December 2010, the Wall Street Journal reported that Google had signed a contract to buy 111 Eighth Avenue in Manhattan for about $1.9 billion.The price was never officially disclosed. Data Center Knowledge, citing the Wall Street Journal, reported about $1.9 billion. TechCrunch and Fox Business reported about $1.8 billion, and the Motley Fool said the price could reach $1.9 billion with transfer taxes and fees. The contract was signed around December 2–3, 2010, and the deal closed on December 22, 2010. The sellers were Taconic, the New York State Common Retirement Fund and Jamestown.
111 Eighth was, in Data Center Knowledge's words, "one of the premier 'carrier hotels' in New York." Built in 1932 as the Port Authority Commerce Building, it fills a full city block, about 2.9 million square feet, from 15th Street to 16th Street between Eighth and Ninth Avenues. Taconic converted it to telecom use in the late 1990s. By 2010, data-center and telecom uses took up roughly a quarter of the building. Digital Realty, Equinix and Telx were colocation tenants. Google already occupied about 500,000 square feet as offices.
So one of the companies that had created the cloud now owned one of the buildings where the Internet's networks met. The landlord of Equinix and Digital Realty in Manhattan was a search engine.
Build or Lease?
By 2011, the largest cloud companies had answered the question that hung over the whole industry: would they build or lease? The answer was both. They built where land and power were cheap and they could take their time, in The Dalles, Quincy and Prineville. They leased where they needed to be close to networks and customers, or where they needed space faster than they could build it.
That answer cut both ways for the landlords. The bad news was that the biggest customers knew exactly what a building cost to build, because they built them. Facebook had published its blueprints to prove it. The good news was that they couldn't build fast enough to keep up with their own growth, and for that they needed somebody else's building. Nowhere was that need bigger than in one county outside Washington, D.C.
Data Center Alley—Loudoun County#
As I wrote in Bandwidth, WorldCom emerged from bankruptcy in April 2004, changed its name back to MCI and moved its headquarters to Ashburn, Virginia. Its $41 billion of debt had been cut to $5.5 billion. A year later, Verizon bought it for $6.6 billion.
The move was a fitting end for the company that had carried so much of the Internet's early traffic. Northern Virginia had been an Internet town from the start. Rick Adams ran UUNET from his house there, and his conversations with MFS's Scott Yeager sparked the creation of MAE-East, one of the Internet's first great meeting points. By the time MCI moved in, Ashburn was already the place where networks went to meet. Equinix had built its first Ashburn data center, DC1, in 1998, and by 2011 it had added four more, totaling nearly 500,000 square feet.The Equinix square footage is from the 2011 Washington Post story as summarized by Data Center Knowledge. As we saw in Chapter IV, AboveNet sold its own Northern Virginia data centers out of bankruptcy for $63 million.
What happened next turned a suburb into the center of the cloud.
In August 2011, the Washington Post reported that Loudoun County had about forty data centers with roughly 4 million square feet of space. The newspaper compared it to twenty-two Wal-Mart Supercenters. Another 800,000 square feet were planned, and the county expected 6.5 million square feet by 2021.I haven't read the Washington Post original. Its content comes from Data Center Knowledge's August 28, 2011 summary, The headline is "After dramatic growth, Ashburn expects even more data centers." Its web address carries the date June 9, 2011, but the page's metadata gives August 27, 2011, and Data Center Knowledge described it as "a story this weekend."
The county's forecast was way too low. In September 2012, Buddy Rizer, then Loudoun's assistant director of economic development, counted nearly 5 million square feet, with 2 million more in the pipeline. He projected 10 million square feet within five years. Digital Realty saw more than 40 megawatts of potential demand in Northern Virginia against about 27 megawatts of supply. Philip Sandino of Dominion Virginia Power said his utility was "seeing an amazing number of inquiries (from data center developers) regarding power."
Rizer's projection was too low too. By September 2016, Loudoun had more than sixty facilities covering about 10 million square feet, with another 3.5 million under construction. The county had hit its 2021 forecast five years early, and then some. According to Rizer, the county hadn't gone a single day without data-center construction since 2008.
Why Loudoun? The power was cheap, about 20 percent below average. The networks were already there. And the county made it easy, because the tax money was extraordinary. By 2016, data centers were paying Loudoun about $110 million a year in taxes. "The tax benefits to Loudoun County have been incredible," Rizer said. Supervisor Ron Meyer put it more simply: "There's 21st-century technology in those buildings."
That same September, the Washingtonian ran a story under the headline "70 Percent of the World's Web Traffic Flows Through Loudoun County." It's a great headline. I can't find a source for it. The magazine presented the figure as an estimate without citing anyone, and later outlets traced it to the county's own economic-development office.Later outlets, including Virginia Business in 2017, attribute the 70 percent figure to Loudoun's Department of Economic Development. I've seen those only as search snippets. Treat it the way you'd treat a forecast in a 1999 IPO prospectus.
The Forecast Ran the Other Way
Here is what strikes me about Loudoun. In Chapter IV, we watched the hosting forecasts come down: eighty-fold growth in five years, then $17 billion by 2003, then about $9 billion. The buildings went up on the forecasts, and the bankruptcies came when the forecasts came down.
In Loudoun, the forecasts kept coming up short. The county's 2011 forecast for 2021 was beaten in 2016. Rizer's 2012 projection was beaten too. For the first time in this book, demand for data-center space was outrunning the people who were paid to predict it.
The brokers' numbers tell the same story. According to JLL, Northern Virginia leased 62 megawatts of data-center space in 2015. In 2017, it leased 115 megawatts, a record. No other market in the world had ever leased more than 59 megawatts in a single year. Land in Ashburn was going for more than $1.2 million an acre. "In Northern Virginia, supply creates demand, and demand drives supply," JLL's Allen Tucker told a forecast conference in Ashburn in early 2018.Reported by Rich Miller in Data Center Frontier, February 2, 2018, from JLL's presentation at the CAPRE Data Center Forecast in Ashburn. The article also gives a 2016 figure of 113 megawatts, though its text has typos. JLL credited Digital Realty with 62 percent of Northern Virginia's 2017 leasing and CyrusOne with 21 percent.
That sentence would have made a fine slogan for Exodus in 1999. Supply creating its own demand is how a bubble talks about itself. What made Ashburn different was who signed the leases.
That's what a handful of very large customers does to a market. When Exodus was selling to thousands of dot-coms, the demand was spread thin and evaporated fast. When Amazon, Microsoft, Google and Facebook needed space, each one needed it by the tens of megawatts. Each lease was enormous. And the developers who could deliver those leases fastest were about to become the hottest stocks in real estate.
In 1998, Andrew Odlyzko showed that the forecasts for Internet traffic were far too high. Nobody had to debunk Loudoun's forecasts. The buildings did it for them, by filling up faster than the county predicted. Keep both lessons in mind for the end of this book. Forecasts can be wrong in either direction, and the direction depends on who the buyers are and whether they can pay.
The Wholesale Developers—Hossein Fateh, Chad Williams and the New REITs#
The data-center business had always sold space by the cage, the rack and the cross-connect. That was Equinix's game, and it's called retail colocation. The cloud customers didn't want a cage. They wanted a whole building, or a whole floor of one, delivered with power and cooling, on a long lease. That's wholesale.In wholesale, a tenant typically leases a large block of space with its own dedicated power, often a megawatt or more, on a lease of several years, and brings its own equipment and staff. In retail colocation, a tenant rents a cage or a few racks, buys power by the circuit and pays for cross-connects to other tenants. Equinix is the archetype of retail; DuPont Fabros was the archetype of wholesale.
The wholesale developers built big, powered buildings and leased them in big pieces to a small number of very large tenants. It was closer to office real estate than to hosting, and Wall Street learned to value it the same way: as a real-estate investment trust. Digital Realty had invented the data-center REIT with its 2004 IPO, as we saw in Chapter V. Over the next decade, four more followed it to market.
DuPont Fabros
DuPont Fabros Technology was the first. In October 2007, it priced 30.5 million shares at $21, the top of its range, and raised about $641 million. Lehman and UBS led the deal. The shares traded as high as $23 early. DuPont Fabros became the second data-center REIT after Digital Realty.The prospectus cover gives 30,500,000 shares; Data Center Knowledge reported 30.575 million. At $21 a share, 30.5 million shares come to about $640.5 million. DuPont Fabros's 10-K for 2007, seen only as a search snippet, says the IPO closed on October 24, 2007, with 35,075,000 shares including the underwriters' over-allotment, for $736.6 million gross and $677.0 million net.
Read the prospectus, and you can see the whole decade coming. Two tenants, Microsoft and Yahoo, paid 85.8 percent of DuPont Fabros's rent. UBS, Google and Fox Interactive Media trailed far behind. The company's new prototype in Ashburn, ACC4, had a first phase in service and fully leased, and its second phase was 56.3 percent pre-leased before it opened. And the risk factors said out loud what every landlord in this chapter would come to fear: "our tenants, including Google, Microsoft, and Yahoo!, own or may in the future develop their own data centers."
The founders did fine. For their property interests and management contracts, Hossein Fateh received units and cash worth about $253 million at the IPO price, and his partner, du Pont, about $275 million.Per the prospectus, Fateh received 6.53 million operating-partnership units plus $37.0 million in cash, together valued at $174.1 million, for his property interests, and units worth $79.2 million for management contracts. Du Pont received 7.58 million units plus $37.0 million in cash, valued at $196.2 million, plus $79.2 million in units. Together they would hold about 35.4 percent of the company. The prospectus states ACC4's first phase came into service in July 2007, 100 percent leased; the 56.3 percent pre-leasing figure for phase two is as of October 15, 2007. The prospectus does not name Facebook.
Data Center Knowledge added a tenant that the prospectus doesn't name. Part of the Ashburn space, it reported, was leased "after Facebook signed a lease for data center space." The social network that would later publish its own blueprints was, in 2007, a wholesale tenant in Loudoun County.
As we saw in Chapter V, DuPont Fabros then walked straight into the financial crisis. A year after the IPO, its shares were trading below $2. "Several banks we were in discussion with have merged or disappeared," its CFO said. CEO Hossein Fateh halted construction in New Jersey and Virginia and mothballed a $270 million project in Santa Clara.
And then the cloud bailed it out. In 2009, every data-center stock tracked by Data Center Knowledge gained at least 53 percent, and DuPont Fabros led the group. "Share prices of many key players in the sector finished with triple-digit gains for 2009," the trade publication reported. The tenants had kept paying rent through the credit crisis, and investors noticed.
Let's do the arithmetic. DuPont Fabros went public at $21 in October 2007. Thirteen months later, its shares traded at $1.93, a drop of more than 90 percent. That was an Exodus-sized collapse. The difference was what sat underneath it. Exodus's buildings were full of dot-coms that couldn't pay. DuPont Fabros's buildings were full of tenants like Facebook that could. The problem was the financing, not the demand, and when the credit markets came back, so did the stock. The buildings were fine. The buildings were always fine. This time, so were the tenants.
CoreSite and Vantage
In 2010, two more platforms appeared, both backed by private equity.
CoreSite was the odd one in the group. Its data centers, its prospectus said, "have been historically funded and held through real estate funds affiliated with The Carlyle Group," and "the first data center in our portfolio was purchased in 2000," at the top of the Gold Rush. In 2007, Carlyle's funds went shopping: 427 South LaSalle in Chicago for $35.0 million, a business park in Santa Clara for $37.8 million, 70 Innerbelt in Boston for $32.5 million, and a building in Reston, Virginia, for $45.0 million. CoreSite had more than 600 customers, more than 200 of them network providers. That made it more like Equinix than like DuPont Fabros, a place where networks met.
CoreSite went public in September 2010, selling 16.9 million shares at $16, the midpoint of its range. It closed its first day at $16.01 and raised about $270 million. It had eleven data centers with about 2 million rentable square feet, and it was based in Denver, just down the road from Zayo's headquarters in Boulder.
Vantage Data Centers launched three months earlier, in June 2010, with funding from Silver Lake. Its first campus covered 18 acres on Walsh Avenue in Santa Clara, served by dual 50-megawatt substations. It already operated more than 6 megawatts of space there, with 6 more under construction. Silver Lake didn't disclose how much it put in. Remember the name Vantage. It will change hands in the next chapter.
CyrusOne and QTS
The last two arrived in 2013, and both were stories of a different kind of owner deciding to get out of the way.
CyrusOne came from Cincinnati Bell, the old phone company, which had run a data-center business in Cincinnati for more than ten years. In June 2010, it bought a Texas operator called Cyrus Networks for about $526 million, net of cash acquired.The CyrusOne prospectus gives "approximately $526 million, net of cash acquired, in June 2010." Cincinnati Bell's May 13, 2010 Form 8-K, announcing the deal, gave a $525 million cash price before adjustments for debt and fees. Cincinnati Bell had also bought GramTel, with centers in South Bend and Chicago, for about $20 million in December 2007. Cincinnati Bell's IPO release, which I read, gives the share count, price and ownership. The total raised, $313.5 million, also comes from snippets. In January 2013, Cincinnati Bell took CyrusOne public at $19 a share, selling 16.5 million shares on Nasdaq under the ticker CONE. Cincinnati Bell kept about 72 percent. A phone company had figured out that the market would pay more for its data centers as a separate REIT than as a line item inside a telco.
CyrusOne's tenants weren't the cloud companies. The energy industry paid 38 percent of its rent, "including five of the six 'supermajor' oil and gas companies," which needed enormous computing power to process seismic data. Nine of the Fortune 20 were customers. The cloud was eating the building, but in Texas the oil companies were still renting space the old way.
QTS Realty Trust priced its IPO in October 2013 at $21 a share, raising $257.25 million. That was well below the $27 to $30 range it had marketed, according to Renaissance Capital.The marketed range is from Renaissance Capital. QTS's own release, which I read, gives the price and the gross proceeds. Its chairman and CEO was Chad Williams, and his prospectus read like a Phoenix-era treasure hunt.
Williams had spent twenty-four years developing what the filing called "special-use, mission-critical facilities." In 2003, he "began acquiring data centers," starting from "a single facility." His method, in the prospectus's words, was "obtaining and revitalizing large, scalable properties." In 2006, he bought a former distribution center for a major retailer near Atlanta, with a 72-megawatt Georgia Power substation on the site. By 2013, it was QTS's largest data center. In 2010, he bought a building in Richmond, Virginia, "through a bankruptcy process." Its former owner, a semiconductor maker, had invested, by QTS's estimate, "over $1 billion" in it, and the building came with 110 megawatts of utility power. In February 2013, QTS bought another old chip plant, in Dallas: 698,000 square feet on thirty-nine acres, with 140 megawatts of power feeds. The cash it paid was $21.2 million.
A chip maker's billion-dollar building, bought out of bankruptcy, and a second fab with 140 megawatts for $21 million. Fiber wasn't the only thing that sold for pennies on the dollar. Power did too, if it came wired into a failed factory, and Williams went shopping for it. The market wasn't sure yet what a data-center REIT was worth. It would figure that out in the next chapter.
A Landlord's Dilemma
By 2013, five data-center REITs were trading in the United States: Digital Realty, DuPont Fabros, CoreSite, CyrusOne and QTS. Equinix would convert to a REIT too, operating as one from January 1, 2015.
The wholesale model had one big strength and one big weakness, and they were the same thing. The tenants were the best credits in the world. Facebook, Microsoft and the rest were not going bankrupt, unlike the dot-coms that had filled Exodus's cages. But there were only a handful of them, and each one knew exactly what its leased space would cost to build, because each one was building its own. A landlord with five customers who can all build without you doesn't have much pricing power. A landlord with five customers who can't build fast enough has a great business.
Which of those was the wholesale business? For most of the decade, the answer was the second. But nobody could be sure the answer wouldn't change.
Zayo—zColo#
In December 2010, Google became our landlord.
At least, it became the landlord of one of our zColo sites. When Google agreed to buy 111 Eighth Avenue, Zayo's colocation business was operating in the building, alongside Equinix, Digital Realty and Telx. zColo was a small tenant in a big building, and the building's new owner was one of the companies reshaping our industry.
How zColo Started
I founded Zayo in 2007 to roll up fiber. Data centers were never the plan. But fiber and data centers are joined at the hip. The most valuable fiber in any city is the fiber that runs into the carrier hotels and data centers where networks meet. Bill LaPerch figured this out at AboveNet years before we did, and as I wrote in Bandwidth, he built his whole strategy around it: "we establish a fiber ring that hits the key carrier hotels and data centers."
On September 9, 2009, Zayo bought FiberNet Telecom Group for $104.1 million.Zayo's 10-K for fiscal 2011 gives $104.1 million. The acquisitions table in the fiscal 2019 10-K lists FiberNet at $96.6 million, apparently net of cash acquired. Along with the rest of the business came something unusual for a fiber company: space and interconnection inside carrier hotels. In the words of our 2011 annual report, "We formed our zColo business unit from a portion of the legacy FiberNet assets."
zColo started with sites in three of the most important carrier hotels in the New York area: 60 Hudson Street and 111 Eighth Avenue in Manhattan, and 165 Halsey Street in Newark. It also had sites in Los Angeles and Nashville. The crown jewel was 60 Hudson. We were, as our 2013 annual report put it, "the exclusive operator of the Meet-Me Room at 60 Hudson Street in New York City," a room where about two hundred global networks interconnected.The FiberNet origin is from Zayo's 10-K for fiscal 2011, and the Meet-Me Room description is from the fiscal 2013 10-K. Neither filing says when zColo was formally launched, and I haven't found a launch press release.
The Roll-Up
Zayo's first zColo acquisition was small. On December 31, 2011, we bought MarquisNet, which ran a single 28,000-square-foot data center in Las Vegas, for $13.6 million.
Six months later came the biggest deal in Zayo's history to that point. On July 2, 2012, we closed on AboveNet for $2.21 billion. I told that story in Bandwidth, and I won't repeat it here. For this book, what matters is that LaPerch's AboveNet came with exactly the fiber rings into carrier hotels and data centers that he had spent a decade building.
zColo kept growing in small bites. By August 2013, it had twenty-five data center and interconnection facilities in nineteen U.S. markets and about 175,000 billable square feet. Its revenue had grown from $43.3 million in fiscal 2012 to $63.4 million in fiscal 2013. That was still a sliver of Zayo, which booked $988.1 million of revenue that year.
Then the bites got bigger. We bought CoreNAP in Austin in May 2013 for $7.1 million and CoreXchange in Dallas in March 2014 for $17.2 million. On July 1, 2014, we paid $51.9 million for Colo Facilities Atlanta, better known as AtlantaNAP. The same day, we bought 96 percent of Neo Telecoms, which brought more than 300 route miles of fiber in Paris.
The biggest zColo deal was Latisys. When we announced it in January 2015, Data Center Knowledge noted that it was Zayo's first acquisition aimed mainly at data centers, after about thirty acquisitions since 2007. Latisys had eight data centers in five markets, Northern Virginia, Chicago, Denver, Orange County and London, with more than 185,000 square feet of billable space and 33 megawatts. It had more than $100 million of revenue, growing about 20 percent a year. Only Chicago overlapped with zColo's existing markets. We closed the deal on February 23, 2015, for $677.5 million, net of cash acquired.The announced price was $675 million. The fiscal 2015 10-K gives $677.5 million net of cash acquired; the fiscal 2019 10-K's acquisitions table gives $677.8 million.
Greg Friedman of zColo explained the logic to the trade press in the plainest terms: "Zayo's been historically a consolidator of infrastructure assets."
By mid-2015, zColo ran "45 datacenter facilities across 37 markets throughout the United States and France," and managed "more than 520,000 square feet of billable colocation space." Smaller deals followed: a Dallas data center from Stream at the end of 2015 for $16.6 million, a Santa Clara data center in 2016 for $11.3 million, KIO Networks' U.S. data centers in 2017 for $11.9 million, and a McLean, Virginia, data center in 2018.The dates and prices are from the acquisitions table in Zayo's 10-K for fiscal 2019: Stream Dallas Data Center, December 31, 2015, $16.6 million; Santa Clara Data Center, October 3, 2016, $11.3 million; KIO Networks US Data Centers, May 1, 2017, $11.9 million; McLean Data Center, April 4, 2018, no price shown. The same table lists forty-five deals through June 2019, totaling $6.6 billion, most of them fiber.
We also lost some. As I wrote in Bandwidth, Crown Castle bought Wilcon, a data center and fiber provider in Los Angeles, and I had tried more than once to buy it myself.
Was owning buildings a good idea for a fiber company? The case for it was simple. A meet-me room like 60 Hudson is where the networks are, and the networks are the customers for fiber. Owning the room puts you at the center of the action. The case against it was just as simple. Data centers eat capital, and a dollar spent on raised floor is a dollar not spent on fiber. And the biggest buyers of data-center space, the cloud companies and the REITs, were also some of the biggest buyers of fiber. Did we want to compete with our own customers for their tenants? Every fiber company that bought a building had to answer those questions, and few answered them the same way twice.
The Ceiling
By fiscal 2018, zColo's revenue had reached $290.7 million. In fiscal 2019, it fell to $269.9 million, "due to lower net installs." Zayo's consolidated revenue that year was $2.58 billion, so zColo was about a tenth of the company. Company-wide, Zayo operated about 1 million square feet of billable colocation space across fifty-one locations in the United States, Canada and Europe.
So zColo grew from a handful of carrier-hotel suites into a real business, and then it stopped growing.
The analysts had a view on what that business was worth. In March 2019, Nick Del Deo of MoffettNathanson took a close look at zColo. He gave Zayo credit for a strategy he summed up as "acquire diamonds in the rough, clean them up, and be left with polished gems." Then he did the math. At 12 times reported EBITDA for zColo, the market was valuing the rest of Zayo at about 9.2 times. At 13 times his own EBITDA estimate for zColo, the core fiber business was implied at about 11.75 times. His verdict on zColo was polite and hard to argue with: "its modest contribution to the overall business means it wouldn't deliver much of a punch."Nick Del Deo and Sydney Marks, "Zayo: Plan A, Version 2.0… A Closer Look at zColo," MoffettNathanson, March 4, 2019. The note came after Zayo dropped a plan to split itself in two and positioned zColo for a sale or a combination. Del Deo gave lower odds than most observers to a sale of Zayo itself. The multiples are from the note's exhibits as summarized on its first pages; I haven't read the full PDF. Del Deo later hosted me for a meeting with his clients, in February 2025, after Bandwidth came out.
A year later, in Zayo's last quarter as a public company, Del Deo reported that the fiber business had grown revenue 7.0 percent while zColo's had fallen 5.3 percent. He called them "poor zColo results." Twelve or thirteen times EBITDA is a respectable price for a business that is shrinking. It is not much of an argument for keeping one.
The Sale
The end of zColo came in two acts, and the first was a bit of theater.
In 2019, while Zayo was negotiating its own sale, I wrote in Bandwidth, "more as a ruse than a contingency plan, we launched a process to sell our data center business." The point was to keep the bidders for Zayo on their toes. The full story of that sale is in Bandwidth. Both bidding groups were serious, capable investors. The data-center process was a sideshow.
It was a sideshow with a full cast, though. Zayo's merger proxy records that on December 21, 2018, a Canadian-headquartered alternative asset manager, which the filing calls "Party A," called me "to discuss a potential purchase of the Company's colocation business, rather than all of the Company." When one of the groups bidding for all of Zayo made its proposal in February 2019, the proposal was contingent on the proceeds of any zColo sale "remaining with the Company." On March 6, Zayo began to solicit interest formally. J.P. Morgan contacted about fifty parties, and twenty-one signed confidentiality agreements. Four bids came in on April 10. The highest, from Party A, was "generally in line with management's valuation expectations." A ruse can still tell you what something is worth.
The second act was real. Digital Colony and EQT took Zayo private in March 2020, as we'll see in the next chapter, and the new owners decided to sell zColo for real. A year earlier, the trade press had reported that the sale could fetch up to $1 billion.
On September 29, 2020, DataBank agreed to buy zColo. DataBank was majority-owned by Digital Colony, which was also one of Zayo's two new owners, alongside EQT. zColo's forty-four facilities would join DataBank's twenty, taking DataBank from nine metros to twenty-nine. Its revenue would grow from about $180 million to about $450 million. Zayo would become DataBank's largest customer. DataBank's president, Kevin Ooley, said what any buyer would want to say about a carve-out: "The [zColo] business has a healthy EBITDA margin."
Neither side disclosed a price. Colony Capital's annual report for 2020 eventually did: "In December 2020, our DataBank subsidiary closed on its acquisition of zColo, the colocation assets of Zayo Group Holdings, Inc. ("Zayo"), consisting of 39 data centers in the U.S and U.K., for approximately $1.2 billion." Outside co-investors put up $0.5 billion of the financing. Zayo, the filing said, "will continue to be an anchor tenant within the zColo facilities."Baxtel reported the price as $1.4 billion on September 30, 2020, with no attribution, and that figure has been widely repeated. Colony's 10-K is the primary source, and its $1.2 billion covers only the thirty-nine U.S. and U.K. data centers. The price of the five French data centers hasn't been disclosed. Colony's own balance-sheet investment was $188 million, falling to about $145 million after a February 2021 capital raise. Data Center Frontier likewise did not disclose a price; it reported that zColo added forty-four data centers in twenty-three U.S. and European markets and that Colony put $145 million from its balance sheet into the deal. Advisers, per search snippets only: DH Capital and Jones Day for DataBank; J.P. Morgan and Skadden for zColo.
Data Center Frontier's report on the deal quoted me: "This agreement allows both parties to focus on their core strengths." That was the whole logic. Zayo did fiber. DataBank did buildings.
The U.S. and U.K. sites closed on December 15, 2020. The five French sites closed separately, on February 3, 2021. "We're excited to finally have all elements of the zColo transaction complete," DataBank's CEO, Raul Martynek, said.
As I wrote in Bandwidth, after Zayo was taken private, the new investors sold its data-center business, and $600 million of the proceeds were distributed to investors and lowered net indebtedness.
Let's do the arithmetic, with the caveat that the pieces don't line up perfectly. FiberNet cost $104.1 million in 2009, and only part of it became zColo. The data-center acquisitions that followed, from MarquisNet to KIO, added up to roughly $800 million, most of it Latisys. Eleven years later, the U.S. and U.K. sites alone sold for about $1.2 billion, and the French sites went separately. Is that a good return? I can't say from the filings alone, because they don't show what we spent building out and running the sites over those eleven years. For a business that was never the plan, it ended up worth more than a billion dollars to somebody else. Nobody would write a book about it, though, which is why it gets a section in this one and not a chapter.
A Handful of Buyers#
By 2016, the data-center business looked nothing like it had in 2006.
Ten years earlier, the industry's customers were thousands of companies renting cages and racks. By 2016, AWS alone was running at about $10 billion of revenue a year, and every dollar of it ran in a data center that Amazon either built or leased. Google, Microsoft and Facebook had become the largest builders and the largest tenants in the industry at the same time. Facebook had published its building designs and told the world the building wasn't its competitive advantage. Google owned one of the most important carrier hotels in New York. Loudoun County had 10 million square feet and was still building every day.
In Bandwidth, I told how the fiber business ended up with a handful of national platforms. The data-center business was heading the same way from the opposite direction. The demand had consolidated first. A handful of cloud buyers now controlled most of the new demand, and each of them could build without you.
That shifted power from the landlords to the tenants. In the Gold Rush, the landlord set the price and the dot-com paid it. By 2016, the tenant knew the landlord's cost to the dollar, had a construction team of its own and could take its business to Quincy or Prineville if the price was wrong.
The rents show it. According to Cushman & Wakefield, wholesale space in Northern Virginia leased for about $143 per kilowatt per month in 2017. By 2020, it was $103, down 28 percent, in the busiest data-center market in the world. The analysts saw the same thing from the other side. In July 2019, after two slow quarters of hyperscale leasing, MoffettNathanson's Del Deo concluded that the cloud's demand for space was intact, "even if it manifests in a lumpy fashion." When five customers make up the market, demand arrives in lumps, and every landlord waits for the next one.
The power bill showed the same concentration, and it gave the cloud a better report card. Remember EPA's 2007 forecast: more than 100 billion kilowatt-hours by 2011. It never came. In 2016, the Lawrence Berkeley National Laboratory found that U.S. data centers had used about 70 billion kilowatt-hours in 2014, about 1.8 percent of the nation's electricity. Use had grown nearly 90 percent from 2000 to 2005, 24 percent from 2005 to 2010 and only about 4 percent from 2010 to 2014.Arman Shehabi et al., United States Data Center Energy Usage Report (LBNL, June 2016). It cites a 2011 update of EPA's method that put 2008 use at 69 billion kilowatt-hours, also 1.8 percent. A later LBNL report, in 2024, revised the level for 2014–2016 to about 60 billion kilowatt-hours using a different method; the two series shouldn't be spliced. The 2016 report projected about 73 billion kilowatt-hours for 2020. Why? The report gave the answer in one line: "Nearly all server shipment growth since 2010 occurred in servers destined for large hyperscale data centers." The computing kept growing. It just moved into the giants' efficient buildings. Had the industry stayed at its 2010 efficiency, the report estimated, it would have needed more than 600 billion additional kilowatt-hours over the decade.
So two forecasts missed in this chapter, in opposite directions. Loudoun's square-footage forecasts came in too low. Washington's power forecast came in too high. Odlyzko would have recognized the second miss. The question for the end of this book is which kind of miss the AI forecasts turn out to be.
None of this made the landlords' business bad. Data-center stocks had come through the crisis better than almost anyone expected, and the cloud companies were the best tenants anyone had ever had. But the landlords were no longer selling to a crowd. They were selling to a club, and the club's members could build their own clubhouse.
How do landlords respond when their customers consolidate? The same way the carriers responded in Bandwidth: they consolidate too. In May 2015, Equinix agreed to buy TelecityGroup in Europe. Two months later, Digital Realty agreed to buy Telx. And a tower investor named Marc Ganzi was about to discover data centers.
The Reconsolidation was underway.