Is colocation the answer to the cloud paradox?

‘There is no business strategy without a cloud strategy.’

Milind Goverkar said in Gartner’s 2021’s press release

Cloud costs are at the epicenter of the strategy and budgeting of companies. The question is, can they leverage colocation to cut their infrastructure spending?

In a previous article, we discussed the paradox of the cloud. The efficiencies and optimizations of the cloud are essential for growing companies. Still, as these efficiencies lead to further growth, the cost of the cloud starts to increase. Some companies have reported that their cloud spent is, on average, 50% of their total cost of revenue (COR).

A report from A16Z shows ‘that across 50 of the top public software companies currently utilizing cloud infrastructure, an estimated $100B of market value is being lost due to cloud impact on margins — relative to running the infrastructure themselves.’

The growing cost of the cloud has now become a key performance indicator for businesses. Spotify has implemented a Cost Insights plugin to ‘bring spending data into an engineer’s everyday development workflow.’ The thinking is that if they see data cost at a granular enough level, they will ‘naturally look for cost optimizations, just like they look for any other optimization.’

As organizations migrate new workloads and build new applications and services in the cloud, they experience the true scale of its unfolding costs. Other companies have found alternatives to constant cost-optimization: cloud repatriation.

Dropbox is an example of a company that decided to repatriate its workloads. By removing them from the public cloud, Dropbox famously cut costs by $75M over two years and increased its gross margins from 33% to 67%.

But dramatic infrastructure moves require a dramatic investment of time, expertise, and budget. Dropbox saved $92.5 million in the first year after leaving AWS – but it cost them $53 million in data center expenses to do so. The initial CapEx and infrastructure team required for successful repatriation to an on-site data center may not be in place. Building the expertise to do it can risk sacrificing resources that could be used for innovation, development, and gaining market share.

And, even at inflated costs, the benefits of the cloud, on-demand capacity, services, support, and locations are still needed by businesses. Cloud repatriation may not be an option, and the rising costs of the cloud can be seen as an essential cost of doing business.

incremental repatriation with colocation

Repatriation from the cloud does not automatically mean your only alternative is to move to your own data center, there’s always the option of colocation, which is a middle ground between both. The goal of reverse migration is to retake control in order to reduce expenses. This can be done in more incremental, less drastic ways.

Colocation is a way to host your IT hardware in a third-party data center, off-premises. Migrating to a private cloud, hosted in a colocation facility, will often outcompete public cloud players on price – particularly when it comes to data-intensive applications.

Even back in 2010, Senior Manager of Production Network Engineering and Architecture at Google, Vijay Gill ran a comparison to see if colocation would be cheaper than using cloud computing services for the same workload. The results showed that the same workload using Amazon Web Services would have cost $107,362.56 compared with $64,371.23 in a colocation facility.

The dramatic results achieved by Dropbox were also not attained through CapEx and returning to an on-premises model. Dropbox switched to colocation for certain parts of its IT infrastructure to take advantage of greater cost efficiencies when compared to the public cloud.

The main difference between the cloud and colocation is managing and storing data. The cloud provider owns servers in the cloud, and data is managed virtually. In colocation, servers are not owned by the colocation facility but by the business that is leasing the space. Commercial, multi-tenant data centers can offer many cost and technology advantages over business-owned facilities, thanks to the economy of scale.

the benefits of colocation

While the rise of the cloud did a lot to establish the narrative that the cloud was a universally better solution, this might not always be the case. On-site data centers and colocation can be a good option depending on your needs. However, in this section we will discuss the benefits of colocation and why it can be a better option for your infrastructure instead of an on-site data center or solely using the cloud.

Colocation offers instant access to a robust infrastructure. Additionally, colocation data centers ensure more transparency regarding the highest standards of network security, including the latest firewalls and IDS systems to detect and prevent unauthorized access to systems.

They will also have redundant network connections and redundant Uninterruptible Power Supplies (UPS) to make sure that business-critical applications always run uninterrupted. The increased power densities of modern servers also need powerful cooling, which can be very costly on a small scale. Even for those companies with just a few servers in an on-premises server room, the savings of colocation can be significant compared to building a dedicated center.

And, like the cloud, colocation centers provide the flexibility to jump to higher bandwidth levels to accommodate their traffic demand without making repeat capital investments. Data spikes can be distributed over time across numerous users, helping to reduce bandwidth costs.

The result is IT infrastructure that can expand to support growth with less investment than a private data center. Just as growing companies once saw the benefits of running their equipment in a shared facility, companies looking to shrink their investment in the cloud are using colocation as a middle ground between a cloud-first approach and private data centers.

Repatriation is often more viable when it comes to more resource-intensive workloads. This means colocation and cloud are now not mutually exclusive. Many companies use both or combine one with other IT infrastructure solutions, retaining a percentage in the cloud.

Cloud once threatened the survival of data centers. Colocation now offers businesses a way back.

The colocation industry was born from the need of young companies to lease space for their infrastructure. Then, more established companies started to supplement their privately-owned data centers with colocation facilities to avoid adding large assets like buildings, cooling systems, and servers to their liabilities and CapEx.

The rise of cloud computing then offered a new way to scale up operations without incurring the initial equipment costs. Smaller data centers were unable to provide the same technologies, and cloud providers were able to offer more competitive prices and SLAs.

With higher upfront costs than a cloud-based solution, colocation services pushed their initial customer base of new businesses to the cloud for lower costs. However, the pricing structure of cloud hosting services started to tip the balance back toward colocation as companies grew.

With all hardware, software, and other supporting infrastructure in a public cloud being owned and managed by the third-party cloud provider, businesses became trapped by the rising costs of an infrastructure they don’t own.

Colocation now represents a ‘soft-landing’ for enterprise companies repatriating from the cloud. It allows companies to move equipment to an offsite facility to cut cloud expenses without needing to build and own an entire data center.

And it also serves as a springboard to private cloud solutions for customers who want to move IT assets off-site but are not quite ready to commit to public cloud platforms. It’s a crucial step that allows for greater infrastructure control without wholesale moves, which can help companies prepare for a smooth cloud transition when it becomes essential.

So, rather than being replaced by the cloud, the global data center colocation market is expected to reach $87.73 billion in 2025 at a CAGR of 16.9%.

With initial equipment still the biggest expense of colocation. Ynvolve can help reduce the initial CapEx costs of the equipment by providing refurbished equipment at a far lower cost. However, investing in equipment might not be part of your plans. Our reps work closely with different Managed Service Providers across the globe. If you would like a recommendation on a potential MSP we can also help with that. Our goal is for your company to find the right solution that matches your budget and needs. To get in touch with one of our experts, send us a message.