Higher Prices Loom For Data-Site Users

Businesses are turning to outside companies to run their data centers faster than
most of those companies can build additional facilities. Now demand is
outpacing supply, and that could potentially drive up prices of data-center
services.

Amid the recession, companies that provide data centers -- the warehouses of
computers that do corporate tasks such as running Web sites and backing up
information -- are having a hard time coming up with the funding for new sites.
DuPont Fabros Technology Inc., a Washington, D.C., data-center company, said
in November that it was suspending construction of two facilities because it was
unable to secure the financing needed to continue the projects. Another datacenter
provider, Savvis Inc., says it has no plans to build facilities in 2009.
Equinix Inc., another such company, plans to cut capital expenditures by $100
million in 2009. And prominent technology companies such as Google Inc. and
Microsoft Corp. also have scaled back plans to build data centers.
The result is the number of commercial data centers will rise just 5.3% year-toyear
in 2009 and 4.75% in 2010, according to Tier1 Research. That is down from
6% in 2008.

The slowdown in new data-center facilities comes at a difficult time. To cut costs
during the recession, many businesses running out of space in their own data
centers have turned to third-party data-center providers to rent out space.
Demand for these services rose 14% from a year earlier in 2008 and is expected
to increase at similar or greater rates for the next several years, according to Tier1
Research.

Now the demand and supply is likely to diverge even more over the next few
years, as the typical data center takes 12 to 24 months to build, says Daniel
Golding, a Tier1 analyst. "It could be a big problem," he says.

It won't be long until current facilities begin to fill up. Globally, the data centers
in use are about 65% full, according to Tier1. The company expects that to hit
70% in 2009 and rise seven percentage points or so each year thereafter. Equinix
says it is operating at about 78% capacity and that it has accelerated development
at a 340,000-square-foot facility it opened in Secaucus, N.J.

Somewhere near 80% capacity, the market hits a point where demand outstrips
supply to a point where prices skyrocket. That is the case in London, where
commercial data centers are operating at about 85% capacity. Prices at the
London centers have doubled over the past year to $115 to $290 a square foot,
says Rakesh Kumar, an analyst with research company Gartner.

In the U.S., prices for space in commercial data centers could rise 10% a year
compared with 3% a year typically, predicts Mr. Golding, the Tier1 analyst. But
he adds that it is still cheaper for businesses to swallow such a price increase than
build their own data center, because the facilities typically cost more than $1,000
a square foot and the price tag for a large center can exceed $100 million.
Some businesses already expect price increases. Bill Weber, senior vice president
for programs and services at GTSI Corp., a government contractor based in
Herndon, Va., began using a data center owned by Savvis in late 2008. Mr.
Weber says he wrote price controls into the contract in anticipation of
skyrocketing prices. "We don't expect to be held hostage when demand gets too
high," he says.

Write to Ben Worthen