Summary: CyrusOne formed a new strategic partnership through a commercial agreement with China’s GDS Holdings. Both companies will work together to market and sell data centre capacity in both the US and China. CyrusOne will make a US$100m equity investment in GDS that will be used to fund GDS’s data centre development projects across markets in China. We break down the strategic and global implications of this deal.
CyrusOne investment: The $100m investment will give CyrusOne an ~8% equity ownership in GDS as well as grant CyrusOne’s CEO Gary Wojtaszek a seat on the GDS board of directors.
Partnership: The commercial agreement between CyrusOne and GDS will see collaboration on the sales and marketing front, and the sharing of best practices. Both firms will enter exclusive referral arrangements for customers in their respective home regions to more easily expand with support around facilitating on-boarding and management of inbound customer demand. The sharing of best practices arrangement will centre around the design and construction techniques/processes, backend customer interfacing systems, as well as policies and procedures on the operations front.
Cross-selling: Notably, CyrusOne management was specific on pushing the angle of customer cross-selling among the massive-scale cloud providers and shared on the investor call that both sides had two customers in common. But how real is this opportunity to capture each other’s cloud customers? Does this mean that Alibaba, Tencent and Baidu will view CyrusOne as their preferred data centre provider for expansion into the US? This appears to be the case, but with most such international partnerships, the truth lies somewhere in the middle. GDS is not new to such equity investments from international data centre providers. Singapore data centre provider ST Telemedia took a 40% stake in GDS back in 3Q14, which is significantly larger than CyrusOne’s 8% stake. Looking back at how STT’s cross-selling relationship with GDS has played out over the pass three years will be a good indicator of what to expect with CyrusOne, granted there are definitely some differences. The scale of STT’s data centre operations at the time of its investment in GDS is different from what CyrusOne brings to the table from a day one standpoint. And of course, there is not geographic overlap.
Chinese cloud customers: The big question is whether CyrusOne can expect to win business from GDS’s Chinese cloud customers moving forward with this new partnership, and all signs suggest this is not a sure thing. Our recent on the ground visits and market studies in Singapore revealed that Chinese cloud companies such as Alibaba are deployed in other non-STT wholesale facilities. And this points to the fact that large cloud firms such as Alibaba, Tencent and Baidu are more likely to purchase data centre capacity largely based on price points. If there is a more cost effective alternative in a particular US city, you can bet that these Chinese cloud firms will not hesitate to take the better deal over going with a strategic partnership that one of its data centre vendors has inked with another counterpart.
CyrusOne upside: While we believe the partnership does not automatically guarantee CyrusOne as becoming the preferred data centre provider for these Chinese cloud firms, its collaborative relationship with GDS will help it to better develop its data centres to reflect the kind of infrastructure architecture that the BAT firms are deploying in China. CyrusOne will essentially get a leg up on the competition by customizing its data centre environments to mimic those that these Chinese cloud firms are already deploying in China, although some level of adaptation is likely since there are notable differences between the US and Chinese markets. If CyrusOne is able to learn from GDS in China and get a better pulse on ramp-up schedules, procurement patterns, as well as facilitated introductions to the respective procurement executives, this would help CyrusOne to better cater to the customization levels of these Chinese firms in a way that other US providers may not be able to.
GDS: The data centre industry outside of China is quickly waking up to the fact that there are very few viable carrier-neutral data centre providers within China. 21Vianet is another sizeable carrier-neutral colocation provider though it has been involved in some fraud controversy in the past couple of years that has likely propelled GDS as the front runner in China. The strong market position and potential upside of GDS can be summed with this analogy: what if there existed a US data centre provider that were able to sign preferred data centre provider relationships with both Amazon Web Services and Microsoft Azure for their data centre capacity needs in the US. That would be GDS’s market position in China as CyrusOne’s $100m investment will provide it with more ammunition to build out more data centre capacity in both the tier 1 and tier 2 markets in China.
Angle: It has become increasingly clear to the US data centre providers that entering the China market must be done very differently from other international markets and even other Asia-pacific markets. Nearly every aspect of the data centre business in China is tightly regulated by the government to create an ideal environment to benefit its homegrown firms. There is an Internet Data Centre (IDC) license that is required to operate and run a data centre. On top of that an interconnection license is also required to provide cross connects and no foreign company is allowed to own more than a 49% stake in a Chinese firm. This makes not only new greenfield market entry into Chinese nearly impossible, but also makes M&A a very challenging scenario as well. The only model that has appeared to gain traction and relevance is the partnership model and making equity investments in transparent Chinese data centre providers. GDS’s profile as a publicly traded data centre firm makes it an ideal investment target for international providers that are wary of risky investments in less transparent Chinese companies. The investment from CyrusOne further solidifies GDS’s market position in China as the default carrier-neutral colocation provider in a market that has been largely dominated by the sizable data centre footprints that have been built by the local telcos such as China Telecom, China Unicom and China Mobile.
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