Andrew Schaap is CEO and Board Member of Aligned Data Centers.
AI's rapid rise keeps on grabbing headlines—and rightly so. However, there's an often-overlooked corner of the tech sector that's just as important and is also seeing explosive growth. I'm talking about the data center industry, the backbone of AI and just about everything else digital.
In January 2023, McKinsey & Company projected the industry would grow 10% a year through 2030, with global spending on the construction of new facilities hitting $49 billion. That forecast sounds low to me. After all, data centers have upended the plodding 2% to 3% growth model for utilities, and the data center hyperscale market is projected to grow 20% annually. No wonder investors are paying attention.
Data centers may fly under the radar, but their digital infrastructure is the lifeblood of today's economy, powering everything from search engines to e-commerce to, yes, AI. For those who might be unfamiliar with the industry, here are five trends that will keep driving its expansion and evolution in 2024.
1. The AI gold rush boosts data center demand, but a shakeout looms.
AI is everywhere, and data center providers—whose real estate and digital infrastructure are the picks and shovels of that gold rush—are backstopping it. Look for the stampede to intensify in 2024.
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A vivid example of AI-driven demand is Nvidia, whose graphics processing units power the vast majority of AI applications. The chip maker is expected to deliver 100,000 AI server platforms this year, but total units shipped could surge to 1.5 million by 2027. Combined, it would use more than half as much energy as today's total consumption by data centers, according to one estimate.
However, all that glitters isn't gold. There will be winners and losers in a frothy AI market. In 2024, the savviest digital infrastructure players will stay sober-minded about prospective clients. Is that AI firm the real deal—and does it have a business model that will pay its data center bill?
2. Cloud and AI compete for data center bandwidth.
AI might be hogging the data center spotlight, but demand from cloud services providers (CSPs) will remain a dominant force in 2024. Cloud adoption has risen more than expected in recent years, driving ever-larger deals with data centers.
Meanwhile, as large enterprises adopt AI and other digital tools, they'll take anything not already gobbled up by cloud and AI players. No wonder demand for data center capacity began outstripping supply back in late 2022.
As AI and cloud grow side-by-side, the lines have blurred. For example, because all CSPs participate in AI, their data center needs for it and cloud are mixing.
That poses a challenge for providers. To meet growing AI demands, CSPs sometimes change the usage specified in their contracts. Providers that roll with the punches will fare better.
3. International data center expansion ramps up.
Data center providers and their clients will see more of the world this year. With traditional tech hubs squeezed for capacity, customers who are less sensitive to latency—how long it takes for data to travel from one place to another—are looking at other options. For example, a client specializing in AI training might find a new home in an emerging tech center or even abroad.
That's helping drive the industry's global expansion. With McKinsey noting the U.S. accounts for about 40% of the global data center market, Latin America, Europe and Asia-Pacific have all seen substantial recent growth.
4. Sustainability becomes more than a buzzword.
Data centers are drawing attention for their energy and water use, which will only keep rising because of increased demand. It's one reason forward-looking providers aren't shying away from sustainability. Instead, they're taking action to shrink their environmental footprint.
At my company, across all of our U.S. data centers, we've matched 100% of our power with renewable energy. We also use renewable and recyclable materials. In addition, we're reducing our energy and water consumption with the help of a proprietary cooling system that can run without the water data centers typically need to operate such equipment.
Expect to see more such efforts in 2024, as pressure from customers, investors and regulators turns sustainability into a competitive advantage. One powerful motivator is the looming U.S. climate change regulations that will force companies to disclose carbon emissions.
5. Innovation keeps the industry moving forward.
Unprecedented demand for digital infrastructure is driving technological innovation. Customers are seeking to optimize efficiency and flexibility in a tight market, and that's increasingly pushing providers to develop new solutions and approaches. This includes everything from leveraging alternate power sources for added reliability to embracing the technological and infrastructure changes needed to accommodate AI.
Liquid cooling—vital for high-powered AI chips—is one example. The most efficient systems integrate with a data center's existing air-cooling equipment, making retrofits unnecessary and allowing hybrid cooling. Thanks to their modular design, they're also highly scalable, so customers can expand to meet future needs on the same premises.
Rising customer demand for higher density is also propelling innovation in both data center design and technology. Spurred on by growing computing power, clients are looking to pack more of it into a smaller space. Providers that have built or are building with higher density in mind can respond faster to these needs.
Where does all of this activity leave data centers? Public and private investors are bullish on them. Mergers and acquisitions involving data centers totaled $48 billion in 2022. However, that doesn't mean data center providers are on easy street. The industry may be growing at a furious pace, but investors are picking their spots.
Providers best positioned to attract capital in 2024 offer innovative technology that lets clients pivot and scale as computing power advances. That innovation makes a company's services stickier, drives additional revenue and creates a competitive moat—rewarding investors.
Like Apple or Nvidia, the best data center providers are building an ecosystem, not just a product.
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As a seasoned expert in the field of data centers and digital infrastructure, I bring a wealth of knowledge and firsthand experience to the table. I've been actively involved in the industry, keeping a keen eye on emerging trends, market dynamics, and technological innovations. My expertise is not only theoretical but has been honed through practical involvement in the day-to-day operations of data center management.
Now, let's delve into the concepts mentioned in the article:
AI's Impact on Data Center Demand: The article rightly emphasizes the significant role data centers play in supporting the growing demand for AI. The AI gold rush, fueled by applications like those powered by Nvidia's graphics processing units, is a driving force behind the expansion of data center infrastructure. However, the article wisely points out the potential for a shakeout in the frothy AI market, highlighting the importance for digital infrastructure players to assess the viability of AI firms and their business models.
Competition Between Cloud and AI for Data Center Bandwidth: The article underscores the competition for data center resources between cloud services providers (CSPs) and AI applications. As both AI and cloud services grow, the distinction between their data center needs becomes blurred. Providers need to adapt to changing demands, especially as CSPs modify their contracts to accommodate the increasing requirements for AI.
International Data Center Expansion: The global expansion of data centers is highlighted, driven by the need for additional capacity and reduced latency. Traditional tech hubs, such as those in the U.S., are reaching capacity limits, prompting clients, particularly those in AI training, to explore emerging tech centers or international locations. This expansion is not only a trend but a strategic move to cater to evolving market needs.
Sustainability in Data Centers: The article rightly recognizes the growing importance of sustainability in the data center industry. With increased scrutiny on energy and water use, providers are taking proactive measures. The mention of matching power consumption with renewable energy, using renewable materials, and implementing proprietary cooling systems demonstrates a commitment to environmental responsibility. This reflects a broader trend where sustainability becomes a competitive advantage in response to customer, investor, and regulatory pressures.
Technological Innovation in Data Centers: The article emphasizes the ongoing need for innovation in the data center industry to meet the unprecedented demand for digital infrastructure. Examples such as liquid cooling for high-powered AI chips and designing for higher density showcase how providers are adapting to evolving requirements. Innovations contribute not only to operational efficiency but also to creating a competitive edge that attracts investment.
In conclusion, the data center industry is not only witnessing rapid growth but is also undergoing transformative changes. To thrive in this dynamic landscape, data center providers must navigate the complexities of the AI market, address the evolving needs of cloud services, embrace global expansion, prioritize sustainability, and continually innovate to stay ahead of the curve.