Colocation: Retail or Wholesale?

By Rich Staas

Director of Client Services, NPI

September 14, 2015

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When looking for a colocation (colo) provider for your datacenter needs, there are several things to consider when making the choice. One decision is whether to go with a retail or wholesale provider. Both allow you to rent space for servers and other computing hardware, but their business models and pricing/contracting behavior are very different.

Retail provider: Retail colo providers don’t own the actual space where the data center is housed; they pay a landlord. Their services/offerings are based on a watt/sq. ft. rating of the facility. The footprint is determined by the plate rating of equipment (with white space allocated if power requirement exceeds rating) and then priced at a $/sq. ft. amount.

To these providers, it’s all about winning more market share and they’ll often eat margin in the beginning of a customer relationship to make it happen. But don’t expect those “wholesale” rates to last long (remember, they have a landlord to pay). In more extreme cases, NPI has seen retail colo providers give customers an “up or out” ultimatum after five years, which forces the customer to pay X rate or move out. More likely, you may experience nickel and diming for things like charging to store servers in an empty room, charging for cross-connects or to run cable, etc.

Wholesale provider: Unlike the retail model, wholesale colo providers “own the dirt.” This is extremely important for two reasons, the first being they don’t pay a landlord. The second reason is because the value of a customer to wholesale providers is based on the value an auditor attaches to their tenancy. That value is based on how likely the customer is to pay their bill and stay in business, and how sticky the deal is (length of term and level of customizations). The viability of your tenancy over the long term is crucial while the $/sq. ft. is less important.

So, which model is better? It depends – a tenant agreement may be more enticing than a leasing agreement for some businesses, and vice versa for others. Retail doesn’t care if you contract for one, two or three years. They see the end of the term as an opportunity to raise your rates. On the other hand, wholesale wants a long-term deal with a lot of customizations, which will make it harder for you to leave. Businesses need to understand the tradeoff between flexibility and long-term costs, and how that aligns with their immediate and future data center requirements.