Cloud, Schmoud—To Really Succeed, Web Companies Need Their Own Data Centers

Nearly 10 years ago Excite and Jotspot founder Joe Kraus exulted: “There’s never been a better time to be an entrepreneur because it’s never been cheaper to be one.” Powerful open-source software running on cheap, commodity hardware meant that entrepreneurs could get to scale and/or profitability much faster without raising capital.

Everything Kraus argued has proved to be true. It is also largely irrelevant.

As it turns out, while it’s cheap to get tens of millions of users with a free web or mobile service, building a large, data-driven business costs a lot of money, and that money is spent on the very thing that cloud computing was meant to obviate: data centers. For every 10 Instagrams that mushroom into prominence on the back of Amazon Web Services (AWS) or another public cloud provider, there is one Google or Facebook that insists upon building its own data centers to control its own destiny.

Data Centers Are A Sign Of Success

Of course, not everyone follows this model. Netflix, for example, famously sticks with AWS even as it scales to gargantuan levels. Content to let AWS invest heavily in infrastructure while it focuses on fine-tuning its service, Netflix is the exception to the rule.

That rule? The bigger you are, the more you need your own data center.

When Apple envisioned the growth in its cloud operations it spent a billion dollars creating a data center to match it. Google, for its part, spent $7.3 billion in 2013 to build out data centers, and over $21 billion total.

Even those companies who opt not to build data centers tend to lease them. Asymco’s list of the largest turnkey wholesale data center leases in 2013 reads like a who’s who of the web-scale world:

Companies like Instagram that find it cheap to start on someone else’s infrastructure find their way to leasing or building data centers, either of their own volition or through acquisition. The reasons, as GigaOm’s Derrick Harris points out, range from “the cost to availability to the complexity of building scalable, high-performance web applications on virtual infrastructure.”

Never Been A Better Time To Build A Data Center

Nine years ago was the perfect time to follow Kraus’ advice to scale out on cloud. Today, though, might be the time to build out data centers. As Vijay Gill, Google’s former network chief who now overseas Microsoft’s global network services, argues:

With interest rates low and cash ready to hand, now would be the time to plough massive investments into fundamental base infrastructure for network companies: fiber, datacenter floor, and CE equipment.

Gill’s comment came in response to economist Larry Summers’ suggestion that low startup costs for technology companies could end up depressing interest rates. The cheaper it is to get to grow and scale, the more would-be investors sit on their cash hoards with no useful ways to deploy it.

Except, as Gill notes, there is a useful way to deploy it, and companies like Google, Facebook and Microsoft are doing just that: building or leasing data centers.

A Data Center To Make Joe Kraus Proud

What they’re not doing, however, is building these data centers with old-school enterprise servers. Instead, as Facebook has done with its Open Compute designs, they’re building them with open-source software and no-name, highly tailored servers. This is why Gartner reported that server shipments went up 2.1% even as revenue for the brand name suppliers went down 4.1%.

In other words, data centers are still expensive—just not as expensive as they would have been back in the proprietary UNIX days.

So yesterday’s success was to build an app or service and quickly amass 100 million users on public cloud infrastructure at reduced cost. Today’s success is to scale to a billion users on one’s own data center infrastructure, controlling the complete user experience. This is best achieved when you own not only the app, but also the underlying infrastructure.

Data centers, in other words, have a future.

Image by Shutterstock