Weekly Update

AT&T data center sale highlights advantages of leasing

Updated: In an earlier version of this article, we mistakenly said that AT&T was the owner of this data center. AT&T was not the owner of this data center. It was owned by a company called Arden Realty Inc. AT&T leased the space from Arden, who recently sold it to Griffin Capital.

This week AT&T joined the ranks of companies getting out of the data center business with the sale of a large facility in Redmond, Wash., to Griffin Capital.

The decision to sell expensive data center real estate in favor of leasing equipment at a co-location facility is a trend that is accelerating with the shift to cloud computing, and it makes sense for many companies whose core business is not IT. They are finding that managing and maintaining large banks of UPS batteries, HVAC and power as their operations grow is not something they are experts in, nor is there any value in their becoming experts in this realm.

In a Gartner report from Dec. 2011 that included interviews with several hundred large enterprises, one-third of respondents said that they are turning to co-location facilities. Expanding the capacity of existing data centers was impossible, due to factors such as not being able to afford additional capital expenditure or not having physical room or sufficient infrastructure in existing data centers. AT&T avoids this issue by leasing the facility in Redmond.

But it is interesting and telling that AT&T would choose this path. To sell a resource as big as this facility and in such a prime location. Redmond is home to Microsoft, Amazon and Boeing, among other corporate giants was definitely eye-catching. The telecommunications giant has more than 10 million square feet of data center floor space in the U.S., and the majority of its business is delivered via these data centers. In other words, these facilities are central to AT&T’s core business; they are not just some buildings it has acquired along the way. If JPMorgan Chase got out of owning its own data centers, nobody would be surprised. It is a bank, and IT infrastructure is not its core business. But AT&T is in the infrastructure business, which makes this data center sale all the more intriguing.

Mark Thiele, the EVP of data center technology at Switch, one of the largest data centers in the world, said that just like everyone else, AT&T is taking a look at its portfolio and figuring out what it is doing as a business today, what it expects to do going forward and where it can be more flexible in terms of its capacity. “The goal is to shrink the amount of lead in your shoes, as lead slows you down,” he said.

Data center real estate is about as heavy an anchor as you can get, and the risks associated with maintaining data centers from a CAPEX standpoint are enormous. There are issues with carbon reporting; increasingly there are restrictions on data ownership, privacy and security; and there is taxation on the use of coal for energy. The list goes on, and these issues weigh heavily on any company owning such a facility.

By selling to Griffin Capital, which will lease the space back to AT&T which means the telco gets to keep its operations at the Redmond facility but on a more flexible basis. It can shrink its capacity over time or grow it, or it can buy capacity somewhere else it might need it more. The ability to scale up and down without incurring costs is the beauty of the cloud model, and, ironically, while AT&T might not have all of its ducks in a row when it comes to selling its own cloud services, it appears the facilities management side of the house gets the economic advantages of pay as you go.

I could be wrong. Perhaps there is a bigger story here in terms of a strategic change at AT&T relative to products and services that we are not being told. AT&T did not respond to requests for comment on this issue at the time of publication. But my guess is the telecom giant is swallowing the same pill as everyone else and gradually offloading its enormous CAPEX investments in data center space. AT&T’s sale is a sign of the times, that even the biggest companies out there are prepared to get out of the data center business and save some money where they can.

Question of the week

What’s going on with this data center in such a prime spot?