Servers As High As An Elephant's Eye

Ever since the Grand Coulee Dam turned the surrounding high desert into prime farmland in the 1950s, the central Washington town of Quincy has been known, to the extent it was known at all, for its potatoes. But earlier this year, Quincy became the latest hot spot on the Internet.

In a matter of weeks both Yahoo! Inc. (YHOO) and Microsoft (MSFT) Corp. announced they would build huge new Internet data centers in the area. These are the facilities that house vast "server farms" comprising computers and other gear to handle the flow of traffic on the Net.

Real estate prices are spiking around Quincy amid talk that the Net building boom is just getting started. "Some plots you could have had for $6,000, folks are asking $50,000 for now," says Patric Connelly, one of the three town commissioners who inked the Microsoft and Yahoo deals.

The land boom illustrates the point at which cyberspace intersects with terra firma. There is an increasing shortage of facilities equipped to massage, transmit, and store the data flowing from the surge in Web-based software and services. You may not give it a thought while firing up a Google search, downloading a song from iTunes, or chatting on the phone via Vonage's (VG) Internet service. But all those tasks have to be processed on computers somewhere. And there are only so many places that offer the necessary cheap power (hydroelectric, in Quincy's case) and access to big fiber-optic networks that can economically host giant rooms full of them. "It's kind of like finding a needle in a haystack," says Michael F. Foust, CEO of Digital Realty Trust Inc. (DLR), a San Francisco real estate investment trust that is a leading developer of data centers.

As more and more of our digital doings take place via Net-based services rather than on software that resides in our home PCs, it's driving up costs for this most unsexy side of techdom. In the past year owners of commercial hosting centers have been able to increase their prices by 20% or more, say some data center operators. Gartner Group Inc. (IT) expects prices to rise as much as 70% in the next year.

If more server farms aren't built -- and a state-of-the-art data center can cost up to $1,000 a square foot, five times the cost of conventional office space -- the squeeze might even crimp the ability of Net up-and-comers to bring new innovations to market. "I'm not seeing what I need to see" in terms of new capacity coming online, says Jay Adelson, the CEO of social networking Web site, who also started Equinix Inc. (EQIX), a Foster City (Calif.) company that operates centers. secured space in Equinix facilities, but Adelson asks: "There are hundreds of me out there, and where are we all going to go? There isn't [enough] data center space."

All this amounts to a gold rush for the companies supplying land, equipment, and services for data centers. Equinix' stock price is up about 65% since a year ago. Rackable Systems Inc. (RACK), which sells highly efficient servers and data storage equipment, has more than tripled its stock price since going public in June, 2005. And a surge in demand for Advanced Micro Devices Inc. (AMD)'s power-sipping server chips is one reason it is humbling rival Intel Corp. (INTC). Then there are the rising data requirements for financial institutions, which need to keep more copies of records, and the fed's security concerns. The result? "This is the strongest demand I've seen in 25 years," says Peter Gross, CEO of EYP Mission Critical Facilities Inc., a Manhattan engineering firm.


This shortage is coming as a shock to not a few Net outfits. During the booming late '90s, companies such as Exodus Communications, AboveNet, and MCI built hundreds of server farms on the assumption that Web business had nowhere to go but up. After the bust left many players wallowing in debt, empty facilities could be purchased for pennies on the dollar, so few new ones were built.

Now, though, that excess capacity has been absorbed. Equinix has announced plans to build two massive centers, in Los Angeles and Chicago. Real estate developers such as Digital Realty Trust and Washington (D.C.)-based DuPont Fabros Development are expanding dozens of existing facilities. Hewlett-Packard Co. (HPQ), Wachovia Corp. (WB), and other major corporations are building vast new facilities to house their own internal computer banks. But developers are still moving cautiously to build new centers. "The dollars required are just so big that no one is going to go out and build and hope they will come," says Lammot DuPont, a scion of the chemical family and principal at DuPont Fabros, which is only now building its first new data center after acquiring nearly a dozen in recent years.

The big Net companies themselves have no choice but to build if they hope to execute their grand online schemes. Take Microsoft. For years its empire was built on desktop software -- in essence, outsourcing the job of running its products to customers who maintained code on their PC hard drives. Now Microsoft is launching initiatives to take on Google and others, including development of Web-based versions of such flagship products as Windows and Office. That requires a huge investment in traffic-processing capacity: The company plans to boost capital spending from $100 million in 2005 to $500 million in 2007, analysts say.

Microsoft already owns server farms that are equal in size to a dozen Madison Square Gardens and consume as much power as 100,000 homes. The company deployed more new servers in the first quarter of this year than in any full year in its history.

With $34 billion in cash, Microsoft obviously can afford to meet its data crunching needs. But others will have to dig deep. Building new data centers can take more than a year, and they're a lot more complex than their warehouse-like exteriors suggest. They must be outfitted with massive air conditioners to prevent the thousands of packed-in servers from overheating, as well as locomotive-sized generators in case of blackouts. "The power goes down more often than you'd like to think," says Margie Backaus, chief business officer for Equinix. It once lost power when a squirrel bit into a power line.

Data center operators must continually devise new tricks to accommodate the power consumed by today's screaming-fast tech gear. So-called blade servers can be packed into cabinets like books on a shelf. But this configuration generates more heat, increasing demand for energy to run cooling systems. In fact, 50% of a center's monthly energy bill can go for cooling, says EYP's Gross. That's why Equinix is replacing the traditional "raised floor" with cables that run overhead in a raised ceiling, allowing much more room for heat to dissipate.

Still, any way you slice it, server farms require lots and lots of power. The Equinix center being built near Chicago will consume 20 megawatts, four times a typical center operating today. DuPont Fabros plans to build a 36-MW facility. That's enough power to satisfy a small city. Which explains why the techies are converging on Quincy. Because of those nearby dams, power there costs 1.89 cents per kilowatt-hour, vs. more than 15 cents in Silicon Valley or Manhattan.

By Peter Burrows

American Apparel's Future

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