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Interconnection 101 As cloud usage takes off, data production grows exponentially, content pushes closer to the edge, and end users demand data and applications at all hours from all locations, the ability to connect with a wide variety of players becomes ever more important. This report introduces interconnection, its key players and busi- ness models, and trends that could affect interconnection going forward. KEY FINDINGS Network-dense, interconnection-oriented facilities are not easy to replicate and are typically able to charge higher prices for colocation, as well as charging for cross-connects and, in some cases, access to public Internet exchange platforms and cloud platforms. Competition is increasing, however, and competitors are starting the long process of creating network-dense sites. At the same time, these sites are valuable and are being acquired, so the sector is consolidating. Having facili- ties in multiple markets does seem to provide some competitive advantage, particularly if the facilities are similar in look and feel and customers can monitor them all from a single portal and have them on the same contract. Mobility, the Internet of Things, services such as SaaS and IaaS (cloud), and content delivery all depend on net- work performance. In many cases, a key way to improve network performance is to push content, processing and peering closer to the edge of the Internet. This is likely to drive demand for facilities in smaller markets that offer interconnection options. We also see these trends continuing to drive demand for interconnection facilities in the larger markets as well. © 2015 451 RESEARCH, LLC AND/OR ITS AFFILIATES. ALL RIGHTS RESERVED. AUG 2015 I 451 RESEARCH ABOUT 451 RESEARCH 451 Research is a preeminent information technology research and advisory company. With a core focus on technology innovation and market disruption, we provide essential insight for leaders of the digital economy. More than 100 analysts and consultants deliver that insight via syndicated research, advisory services and live events to over 1,000 client organizations in North America, Europe and around the world. Founded in 2000 and headquartered in New York, 451 Research is a division of The 451 Group. © 2015 451 Research, LLC and/or its Affiliates. All Rights Reserved. Reproduction and distribution of this publication, in whole or in part, in any form without prior written permission is forbidden. The terms of use regarding distribution, both internally and externally, shall be governed by the terms laid out in your Service Agreement with 451 Research and/or its Affiliates. The information contained herein has been obtained from sources believed to be reliable. 451 Research disclaims all warranties as to the accuracy, completeness or adequacy of such information. Although 451 Research may discuss legal issues related to the information technology business, 451 Research does not provide legal advice or services and their research should not be construed or used as such. 451 Research shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpreta- tions thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results. The opinions expressed herein are subject to change without notice. New York London 20 West 37th Street, 6th Floor Paxton House (5th floor), 30 Artillery Lane New York, NY 10018 London, E1 7LS, UK Phone: 212.505.3030 Phone: +44 (0) 207 426 0219 Fax: 212.505.2630 Fax: +44 (0) 207 426 4698 San Francisco Boston 140 Geary Street, 9th Floor 1 Liberty Square, 5th Floor San Francisco, CA 94108 Boston, MA 02109 Phone: 415.989.1555 Phone: 617.275.8818 Fax: 415.989.1558 Fax: 617.261.0688 © 2015 451 RESEARCH, LLC AND/OR ITS AFFILIATES. ALL RIGHTS RESERVED. II Interconnection 101 TABLE OF CONTENTS SECTION 1: EXECUTIVE SUMMARY 1 1.1 INTRODUCTION . .1 1.2 KEY FINDINGS . .1 1.3 METHODOLOGY . .1 SECTION 2: WHAT IS INTERCONNECTION, AND WHERE DOES IT COME FROM? 3 2.1 CARRIER-NEUTRAL DATACENTER VS MEET-ME ROOM . .4 Figure 1: Carrier-Neutral Datacenter Compared with Meet-Me Room . 4 2.2 INTERCONNECTING THE INTERNET . .5 2.2.1 Private Interconnection . 5 Figure 2: Internet Transit . 6 Figure 3: Private Peering . 7 Figure 4: Internet Transit Plus Peering . 9 2.2.2 Public Interconnection or Public Peering . 9 Figure 5: Public Peering Platform . 10 Figure 6: Public Peering in the US vs. Europe . 10 SECTION 3: INTERCONNECTION AS A BUSINESS 11 3.1 COMPONENTS . 11 3.1.1 The Building . 11 3.1.2 Bandwidth . 12 3.1.3 Cross-Connects . 12 3.1.4 Public Peering Platform . 12 3.1.5 Access to Other Customers in the Facility, Particularly Cloud Providers. .12 3.1.6 Additional Services. .12 3.2 SUPPLY AND DEMAND . 13 3.2.1 Supply . 13 3.2.2 Demand . 14 3.3 CUSTOMERS . 15 Figure 7: Customers of Interconnection Facilities . 15 Figure 8: Drivers of Facility Selection. .17 © 2015 451 RESEARCH, LLC AND/OR ITS AFFILIATES. ALL RIGHTS RESERVED. III 451 RESEARCH SECTION 4: INTERCONNECTION PROVIDERS 18 Figure 9: 451 Research Interconnect Market MapTM . 18 Figure 10: Interconnection Provider Segments. .19 Figure 11: Summary Chart: Market Challenges and Innovations . 21 SECTION 5: EVOLUTION OF INTERCONNECTION: TRENDS AND DISRUPTORS 22 5.1 CONTINUED GROWTH OF INTERNET TRAFFIC AND THE NEED FOR INTERCONNECTION . 22 5.2 INCREASE IN THE NUMBER OF FIRMS INTERCONNECTING . 22 5.3 GROWING REQUIREMENT FOR INTERNET CONNECTIVITY AT THE EDGE . 23 5.4 CLOUD’S IMPACT ON INTERCONNECTION . 24 5.5 NET NEUTRALITY . 26 5.6 ‘PRIVATIZATION’ OF THE INTERNET . 26 5.7 COMPETITIVE CHANGES . 27 5.7.1 Open-IX . 27 5.7.2 European Exchanges in the US . .28 5.7.3 Additional Competition . 28 5.8 TECHNOLOGY TRENDS . 29 SECTION 6: THE 451 TAKE 30 APPENDIX A: GLOSSARY 31 APPENDIX B: KEY CARRIER HOTELS IN NORTH AMERICAN MARKETS 33 APPENDIX C: LOCATIONS FOR DIRECT CONNECTIONS TO CLOUD PROVIDERS 34 AWS Direct Connect Locations. .34 Microsoft Azure ExpressRoute Locations. .34 APPENDIX D: OPEN-IX CERTIFIED PROVIDERS 35 INDEX OF COMPANIES 36 © 2015 451 RESEARCH, LLC AND/OR ITS AFFILIATES. ALL RIGHTS RESERVED. 1 451 RESEARCH SECTION 1 Executive Summary 1.1 INTRODUCTION Interconnection has come a long way since telecommunications providers connected their networks in order to exchange voice traffic. Now, in addition to carriers, many other kinds of firms need to connect with each other to exchange data traffic, and interconnection itself has become a business. Facilities where the largest number of firms can meet have become extremely valuable. This report looks at the business of interconnection and discusses trends that are likely to impact it going forward. 1.2 KEY FINDINGS • Network-dense, interconnection-oriented facilities are not easy to replicate and are typically able to charge higher prices for colocation, as well as charging for cross-connects and, in some cases, access to public Internet exchange platforms and cloud platforms. • Competition is increasing, however, and competitors are starting the long process of creating network-dense sites. At the same time, these sites are valuable and are being acquired, so the sector is consolidating. Having facilities in multiple markets does seem to provide some competitive advantage, particularly if the facilities are similar in look and feel and customers can monitor them all from a single portal and have them on the same contract. • Mobility, the Internet of Things, services such as SaaS and IaaS (cloud), and content delivery all depend on network performance. In many cases, a key way to improve network performance is to push content, processing and peering closer to the edge of the Internet. This is likely to drive demand for facilities in smaller markets that offer interconnection options. We also see these trends continuing to drive demand for interconnection facilities in the larger markets as well. 1.3 METHODOLOGY This report on interconnection services is based on a series of in-depth interviews with a variety of stakeholders in the industry, including technology vendors, surveys and interviews of IT managers at end-user organizations across multiple sectors, datacenter service providers and providers of connectivity services. This research was supplemented by additional primary research, including attendance at trade shows and industry events. Please note that the names of vendors and service providers are meant to serve as illustrative examples of trends and competitive strategies; company lists are comprehensive, but are not intended to be exhaustive. The inclusion (or absence) of a company name in the report does not necessarily constitute endorsement. © 2015 451 RESEARCH, LLC AND/OR ITS AFFILIATES. ALL RIGHTS RESERVED. 2 Interconnection 101 Reports such as this one represent a holistic perspective on key emerging markets in the enterprise IT space. These markets evolve quickly, so 451 Research offers additional services that provide critical marketplace updates. These updated reports and perspec- tives are presented on a daily basis via the company’s core intelligence service, 451 Research Market Insight. Forward-looking M&A analysis and perspectives on strategic acquisitions and the liquidity environment for technology companies are also updated regularly via 451 Market Insight, which is backed by the industry-leading 451 Research M&A KnowledgeBase. Emerging technologies and markets are also covered in additional 451 Research chan- nels, including Datacenter Technology; Enterprise Storage; Systems and Systems Manage- ment; Enterprise Networking; Enterprise Security; Data Platforms & Analytics; Dev, Devops & Middleware; Business Aps (Social Business); Managed Services and Hosting; Cloud Services; MTDC; Enterprise Mobility; and Mobile Telecom. Beyond that, 451 Research has a robust set of quantitative insights covered in products such as ChangeWave, TheInfoPro, Market Monitor, the M&A KnowledgeBase and the Datacenter KnowledgeBase. All of these 451 Research services, which are accessible via the Web, provide critical and timely analysis specifically focused on the business of enterprise IT innovation.
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