Global real estate firm Cushman & Wakefield recently ranked Brazil and Mexico among the ‘riskiest’ countries for building and operating next-generation data centers. Despite the operational obstacles, data collocation and cloud services companies, like Amazon Web Services (AWS), Equinix and IBM, have big expansion plans for markets south of the Rio Grande. That’s because the region suffers from a deficiency in data center infrastructure which, according to Datacenter Dynamics, makes it a suddenly lucrative market.
In their 2012 Data Centre Risk Index, Cushman & Wakefield ranked 30 countries based on various ‘risk factors’ endemic to their environment for data centers. Brazil hit rock bottom in the rankings, with India, Indonesia, Mexico, and China topping the top five most ‘risky’ countries. According to the study, expensive energy, spotty international bandwidth, and a challenging business landscape pose the biggest concerns for data center operators. Brazil and Mexico also ranked on other categories including ‘corporate taxation’ and ‘political stability’.
Short on Server Space
Despite the risks, C&W noted that “the need to be in a particular territory will often take precedence over the risks highlighted by the Index”. Basically, enterprises in developing countries are typically hard up for cheap data infrastructure making these markets ripe for new entrants. A recent report produced by Datacenter Dynamics also supports the notion that opportunities far outweigh the risks in Latin America. In 2012 alone, server space is expected to increase by 45 percent in Brazil, 40 percent in Colombia, 36 percent in Argentina, and 17 percent in Mexico. Total infrastructure investments in these countries will reach 11.8 billion U.S. dollars in 2012.
Leasing local server space is also important to Latin American businesses. A list of issues including security, download speeds, taxes, cultural preference and government regulation keep Brazilian companies, like Gol Airlines and daily deals website Peixe Urbano, from leasing rack space in the United States. “If you want a piece of the Latin America’s data business, then you need servers in Latin America,” explained Keith Inglis, partner with the C&W data center practice. Diverse IaaS companies like Amazon have added incentive to build out the data centre ecosystem in countries like Brazil. The company expects to launch the Kindle in Brazil any day now in an effort to tap into the local e-reader market. Having data centers in Brazil helps Amazon strengthen its overall position in the market for all of their products and services.
Terremark (acquired by Verizon in 2011) also recently announced its second major expansion of Sao Paulo data center, Network Access Point (NAP) do Brazil. Once completed, the facility will house 150,000 servers throughout 70,000 square feet of floor space. Global data hosting provider Equinix also has big plans for Brazil after recently purchasing ALOG Data Centers with private equity partner Riverwood Capital. The company now looks to grow their presence in Rio after high growth particularly in the financial services market.
Traffic Will Intensify
The larger and economically diverse countries like Brazil and Mexico clearly present the biggest market opportunities for data center services, but smaller niche countries with low risk profiles might be safer havens for cloud infrastructure operators. Countries like Uruguay with relatively stable governments/economies and lower cost of ownership could present unique cost-saving opportunities. On the other hand, hurricanes in Central America and earthquakes in Chile undoubtedly weigh heavily on build-out decisions which in the long-run could stunt competition in these markets.
Tax stipulations also favor niche markets like the Cayman Islands. In order to qualify for tax exemption, financial institutions seeking shelter in places like the Cayman Islands must have at least part of their core IT infrastructure physically located there. For collocation and private-cloud IaaS providers, capacity in the Cayman Islands could prove valuable. Tax exemptions on imported servers and other hardware is yet another piece of the tax haven puzzle.
Data traffic between the United States and Latin America is also growing prompting companies like Google to beef up their infrastructure in Miami, Florida, a major connectivity gateway into Latin America. Vurbia Technologies, a US-based IaaS provider targeting Latin America, finds that clients often sacrifice local hosts for cheaper US-based virtual server space. As connectivity between the U.S. and Latin America continues to improve, Miami will be a hotspot for cloud operators targeting Latin America.
Enterprise Migration to Cloud
The cloud computing services market for enterprises is booming expecting to nearly double from $3.4 billion in 2011 to $5 billion this year, according to Gartner. In a recent interview with CIO.com, Gartner research director Bryan Britz noted that “there is definitely some displacement or substitution of cloud for what might have otherwise been delivered through more traditional outsourcing models taking place.” This trend toward cloud-based services could hurt long-term data infrastructure development in higher-risk countries.
Mature markets like the United States are transitioning from a local to global infrastructure model. This transition helped create a more robust data infrastructure network. By sidestepping the local build-out phase, higher-risk markets (like Bolivia or Venezuela for example) could run the risk of becoming ‘server deserts’, leaving them more dependent on foreign infrastructure, as local enterprises increasingly leverage the cloud in their daily operations.