DATA CENTER COLOCATION MARKET ANALYSIS

Data Center Colocation Market Size and Trends

The Global Data Center Colocation Market is estimated to be valued at US$ 82.46 Bn in 2024 and is expected to reach US$ 186.24 Bn by 2031, exhibiting a compound annual growth rate (CAGR) of 12.3% from 2024 to 2031.

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The Data Center Colocation market growth is driven by growing demand for third-party data center services among enterprises. Key players in the market are increasingly investing in development of large data center campuses to cater to the demand from hyperscale companies. Additionally, the COVID-19 pandemic led to a surge in demand for digital infrastructure and cloud computing. This has necessitated construction of new data centers and expansion of existing ones. Growing reliance on public cloud, big data analytics, and 5G technology is also driving more organizations to rely on colocation providers for the management and hosting of their critical applications and IT infrastructure. Overall, cheaper operational costs, robust connectivity options, and abilities to scale on demand offered by colocation continue to make a strong business case over traditional in-house data center models.

The growth of cloud computing and need for scalability

The rise of cloud computing has transformed how businesses of all sizes operate and consume IT services. Cloud providers rent out large numbers of servers located in their global data centers to support the delivery of various cloud-based solutions like IaaS, PaaS, and SaaS. However, building and managing their own data centers requires massive upfront capital investments and operational expenses. Data center colocation provides cloud companies an attractive alternative where they can lease space, power, and cooling infrastructure on demand from colocation providers. This helps cloud players scale their infrastructure quickly as their customer base and workloads grow at a rapid pace.

Colocation services give cloud firms the scalability and flexibility to avoid being locked into specific locations or capacities. Colocation providers offer cloud operators a pay-as-you-grow model through their flexible leasing contracts and dedicated connections between colocation facilities.

Besides scalability, collocating in third-party data centers also spares cloud providers the complexities of owning, managing and maintaining the physical infrastructure. This allows their technical staff to focus more on developing new cloud-based offerings and enhancing the client experience rather than diverting resources to facility management tasks. Overall, outsourcing infrastructure footprint to colocation providers has been a significant driver that has strengthened the rapid digital transformation brought upon by cloud computing over the past decade.

Market Concentration and Competitive Landscape

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Rise of edge computing and the need for regional presence

Edge computing is emerging as the next big thing in the IT industry as more applications and workloads require ultra-low latency connectivity. With edge, the goal is to process data as close to its source as possible in order to achieve single-digit millisecond response times compared to multiple seconds on the public internet. This makes edge computing highly suitable for use cases such as autonomous vehicles, telemedicine, augmented/virtual reality, and smart manufacturing among others.

To gain an edge computing foothold, many large cloud and internet firms are deploying regional edge nodes inside third-party data centers, telecom towers, and even retail stores. They seek to establish a local presence in major metro areas worldwide to reduce distance between end users and application logic. Colocation facilities play a crucial role here by providing these firms infrastructure slots near user populations with carrier-neutral connectivity to all the major networks.

Rather than laying their own fiber, companies can leverage the existing network fabric at colocation sites which often span extensive on-ramps to the public internet as well as private interconnections. Edge resources are also outsourced to colocation providers as they offer low entry barriers through flexible lease terms and scale-out modules suited for distributed edge nodes. This has enabled the rapid expansion of multi-access edge computing infrastructure critical for next-gen low-latency applications. Overall, the rise of edge computing is driving increased infrastructure footprint at regional colocation hubs.

Key Takeaways from Analyst:

With more companies adopting cloud-based solutions and digital transformation initiatives, the demand for colocation services is rising rapidly. The need for scalable and redundant infrastructure coupled with growing concerns around data sovereignty is a major driver for the colocation market.

North America currently dominates the global colocation market due to heavy investments in upgradation of legacy infrastructure and presence of major technology giants in the region. However, Asia Pacific is predicted to be the fastest growing market in the coming years. This can be attributed to the increasing internet penetration, growing adoption of cloud-based applications, and rising investments by global data center providers in major Asia Pacific markets like China, India, and Japan.

Nevertheless, high initial costs associated with deploying colocation infrastructure can restrain the small enterprises from adopting these services. Also, dependence on third-party infrastructure for mission-critical functions remains a challenge. On the positive side, the growing edge data center requirements from 5G rollout and IoT applications is expected to open new opportunities.

The increasing acceptance of hybrid infrastructure models combining on-premise and colocation services is another trend that will favor market expansion.

Market Challenges: Control over infrastructure and customization limits

One of the key challenges in the global data center colocation market is the limited control that customers have over the infrastructure and lack of customization options. When customers opt for colocation services, they have to manage their IT infrastructure within the hosted facilities of the colocation providers. This means that they do not have full control over factors like power infrastructure, temperature and humidity controls, security systems, and others. They have to work within the predefined parameters set by the colocation data centers. Additionally, most colocation providers offer standardized rack space and power configurations. This limits customization as per the specific infrastructure requirements of the customers. For complex workflows that require dedicated hardware or customized configurations, off-the-shelf colocation may not be suitable. This restricted control and lack of flexibility poses challenges for customers that have very specific infrastructure needs for their mission-critical applications and workloads.

Market Opportunities: Adoption of cloud and rising demand for dedicated hosting

One of the major opportunities for the global data center colocation market is the rising adoption rates of cloud-based services among organizations globally. As more businesses migrate their infrastructure and applications to the cloud, it is leading to an increase in the demand for colocation services. This is because hyperscale cloud providers like AWS, Microsoft Azure, etc. rely on third-party data center services to host their cloud infrastructure. The growing popularity of cloud and increased reliance on it by businesses is directly driving the need for colocation space and power. At the same time, there is rising demand from companies for dedicated hosting infrastructure that can offer higher level of control and scalability compared to shared hosting plans. This represents a lucrative opportunity for colocation providers to expand their portfolio through customized dedicated server solutions tailored to support mission-critical hosting requirements.

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Insights By Colocation Service - Convenience and Scalability Drive Retail Colocation Adoption

In terms of colocation service, the retail colocation segment is expected to hold 59.8% share of the market in 2024 owing to the convenience and scalability it offers to customers. Retail colocation provides enterprises of all sizes easy access to data center resources without the challenges of building and maintaining their own infrastructure. Customers are able to quickly deploy their servers and other IT equipment in secure colocation facilities with all necessary power, cooling, space and connectivity already in place. This allows them to focus on their core business operations rather than data center management. Additionally, retail colocation offers the flexibility for customers to easily scale their IT footprint up or down as their computing needs change. They can add or remove server racks, storage capacities or bandwidth levels on demand without heavy capital investments. This pay-as-you-grow pricing model makes retail colocation very attractive for businesses undergoing digital transformation or those in growing industries. The reliability, security and round-the-clock support from colocation providers also eliminate single points of failure for customers. Overall, the convenience of plug-and-play deployments along with excellent scalability has driven wider adoption of retail colocation services.

Insights By Organization Size - Large Enterprises Drive the Take-up of Wholesale Colocation

In terms of organization size, the large enterprises segment is expected to hold 62.7% share of the market in 2024 owing to critical IT infrastructure requirements. Wholesale colocation is the preferred option for large enterprises with substantial IT resources as it provides them dedicated space, power and cooling within the data center facility. This allows them to install and manage all their servers and networking equipment independently while leveraging the security, connectivity and support of the colocation provider. Large enterprises require mission critical systems that demand higher levels of customization, control and security which wholesale colocation aptly addresses. They can deploy resources according to their predetermined specifications and ensure round-the-clock access and management of their dedicated data hall or suite. Wholesale colocation also enables large enterprises to avoid vendor lock-ins by easily switching out infrastructure from one provider to another. The significant IT budgets and demands of bandwidth-intensive applications have made wholesale colocation highly suitable for the deployment and management challenges of large enterprises.

Insights By Vertical - Scalability and Cloud Affinity Drives IT and Telecom Adoption

In terms of vertical, IT and telecom segment is expected to hold 34.9% share owing to the dynamic needs of the industry in 2024. As leading digital services providers, IT and telecom companies require scalable data center infrastructure that can easily scale up or down based on fluctuating traffic and demand levels. Retail and wholesale colocation addresses this need perfectly by offering flexible and elastic compute and storage capacities on demand. Colocating their infrastructure also enables IT and telecom providers to leverage location-specific advantages to improve connectivity for their clients. Colocating also helps these companies optimize resource utilization of their on-premise infrastructure while tapping cloud-based innovations. Overall, the scalability and cloud affinity of colocation models have made it increasingly attractive for the dynamic IT and telecom industry vertical.

Regional Insights

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North America dominates the global data center colocation market with an estimated 36.3% market share in 2024. The U.S. accounts for the major share due to strong presence of major tech giants such as Google, AWS, IBM, Microsoft, and others who have established their data centers across various U.S. states. The growth in the region can be attributed to rapid digitization and increasing reliance on cloud-based solutions among enterprises of all sizes. Moreover, aggressive retail colocation strategies by major data center operators like Equinix, Digital Realty, and others have further boosted the demand in North America over the years.

The APAC region, led by China and India, is witnessing the fastest growth globally. Various factors such as a surge in smartphone and internet penetration, growing cloud adoption and increasing foreign investments in the technology sector have been driving unprecedented growth in online activity and data usage. This has translated to significant demand for data center infrastructure including colocation facilities and hybrid cloud services. Countries like Singapore have emerged as preferred destinations for hyperscale data center builds and major operators are investing heavily in capacity expansions to capture the burgeoning colocation opportunities. Further, the lower cost of real estate, power and skilled labor compared to developed markets lure global operators to establish their presence in high-growth APAC nations.

Market Report Scope

Key Developments

• In August 2023, Digital Realty (NYSE: DLR), the largest global provider of cloud- and carrier-neutral data center, colocation, and interconnection solutions, introduced high-density colocation services across its PlatformDIGITAL global data center platform. This offering, available in 28 markets across North America, EMEA, and Asia Pacific, supports workloads of up to 70 kilowatts per rack and utilizes innovative Air-Assisted Liquid Cooling (AALC) technologies. Digital Realty's high-density colocation services enable businesses to overcome the challenges associated with the exponential growth of data and the increasing adoption of artificial intelligence (AI) by providing high-performance computing (HPC) ready infrastructure configurations.
• In May 2022, CoreSite, a leading hybrid IT solutions provider and subsidiary of American Tower Corporation, announced the implementation of a modern, energy-efficient cooling system at its Boston data center. This upgrade is expected to save approximately eight million kilowatt-hours annually and reflects CoreSite's ongoing commitment to enhancing power and cooling efficiency across its data center portfolio. The new cooling system features a chiller plant with advanced technology designed to optimize energy use while meeting the diverse needs of its customers.

*Definition: The global data center colocation market involves hosting of servers, storage and networking equipment of an organization in a third-party data center. Colocation provides dedicated, shared or virtual space that businesses can occupy within a data center facility which house advanced security systems, redundant power and network connectivity infrastructure. Companies lease this shared infrastructure from colocation providers which eliminates the capital expenditure required to build their own data center infrastructure. Colocation services offer scalable options for businesses to expand their IT infrastructure with their data located off-premise managed by colocation specialists.

Market Segmentation

• Colocation Service Insights (Revenue, US$ Bn, 2019 - 2031)
• • Retail Colocation
  • Wholesale Colocation
•  Organization Size Insights (Revenue, US$ Bn, 2019 - 2031)
• • Small and Medium-Sized Enterprises (SMEs)
  • Large Enterprises
•  Vertical Insights (Revenue, US$ Bn, 2019 - 2031)
• • BFSI (Banking, Financial Services, and Insurance)
  • IT and Telecom
  • Healthcare
  • Government
  • Manufacturing
  • Others (including Retail, Education, Media, and Entertainment)
• Regional Insights (Revenue, US$ Bn, 2019 - 2031)
• • North America
    • U.S.
    • Canada
  • Latin America
    • Brazil
    • Argentina
    • Mexico
    • Rest of Latin America
  • Europe
    • Germany
    • U.K.
    • Spain
    • France
    • Italy
    • Russia
    • Rest of Europe
  • Asia Pacific
    • China
    • India
    • Japan
    • Australia
    • South Korea
    • ASEAN
    • Rest of Asia Pacific
  • Middle East & Africa
    • GCC Countries
    • Israel
    • South Africa
    • Rest of Middle East & Africa
• Key Players Insights
  • Alibaba Cloud
  • CyrusOne Inc.
  • Digital Realty Trust, Inc.
  • Equinix, Inc.
  • Global Switch
  • Iron Mountain Incorporated
  • NTT Communications Corporation
  • QTS Realty Trust, Inc.
  • Rackspace Technology, Inc.
  • STT GDC Data Centers
  • Switch, Inc.
  • T5 Data Centers
  • Telehouse International Corporation
  • TierPoint LLC
  • Vertiv Holdings Co.