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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I'm Andrew Schaap, the CEO and Board Member of Aligned Data Centers, and I bring extensive expertise in the data center industry. My firsthand experience and in-depth knowledge allow me to shed light on the often-overlooked but crucial aspects of this sector.
The article discusses the significant and explosive growth of the data center industry, projecting a 10% annual growth through 2030, with global spending reaching $49 billion by that time. However, I find this projection conservative, considering the rapid evolution and transformative impact of data centers on various sectors.
Here are key concepts and trends covered in the article:
AI Gold Rush and Data Center Demand:
- The AI industry's exponential growth is boosting demand for data centers, acting as the backbone for AI applications.
- Notable examples include Nvidia, whose graphics processing units power the majority of AI applications, leading to a surge in demand for AI server platforms.
Competition Between Cloud and AI for Data Center Bandwidth:
- Cloud services providers (CSPs) continue to drive demand for data center capacity, with cloud adoption surpassing expectations.
- As AI and cloud grow together, the lines between their data center needs are becoming blurred, posing challenges for providers.
International Data Center Expansion:
- Traditional tech hubs facing capacity constraints are prompting clients, especially in AI, to explore options abroad.
- The global expansion of the data center industry is evident, with substantial growth in Latin America, Europe, and Asia-Pacific.
Sustainability in Data Centers:
- The environmental impact of data centers, particularly energy and water use, is gaining attention.
- Forward-looking providers are adopting sustainability measures, such as using renewable energy and recyclable materials, to reduce their environmental footprint.
Innovation Driving the Industry:
- Unprecedented demand for digital infrastructure is fostering technological innovation in data centers.
- Examples include liquid cooling for high-powered AI chips and innovative designs to accommodate higher density, responding to growing computing power needs.
The article emphasizes that while the data center industry is growing rapidly, success lies in innovation. Companies that offer innovative technology, enabling clients to pivot and scale with advancing computing power, are best positioned to attract capital in 2024. Building an ecosystem rather than just a product is key for sustained growth and investor confidence.