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Equinix Inc., the Internet’s Biggest Landlord
Data-Center Giant Rents Space to Virtually Every Firm Operating Online
Equinix Chairman and CEO Stephen Smith in August 2011. The company reports earnings Wednesday. DAVID PAUL MORRIS/BLOOMBERG NEWS
Updated Oct. 28, 2014 6:32 a.m. ET
Data-center giant Equinix Inc. is hardly a household name, but it’s hard to find a household that isn’t in some sense a customer.
With a string of network hubs from Shanghai to Dubai, the company has become the Internet’s biggest landlord, renting slices of its air-conditioned floors to virtually every company that operates online.
That commanding presence has made it a flashpoint in the debate between purists who see the Internet largely as a utility and companies like Equinix, which built its business on the commercialization of the Web’s connective tissue. It has also led an unlikely group of engineers from companies like Netflix Inc. and Comcast Corp. to launch a nonprofit association they hope will spur cheaper alternatives.
The impact of this tug of war will again be on display Wednesday, when Equinix reports its third-quarter results. Analysts expect the company to again post growing profit as it sells more space in its existing data centers. The company is also preparing to convert itself into a tax-advantaged real-estate investment trust, a plan that has boosted its stock over the past year.
‘We can send in requests to get things done, and they get it done.’
—Mike Leber, CEO of Internet service provider Hurricane Electric LLC
Founded in 1998 and a survivor of the dot-com bust a decade ago, Equinix dominates an arcane but crucial Internet function: It runs the meeting points where companies likeGoogle Inc. and Nasdaq OMX Group Inc. physically wire their networks together.
Equinix owns more of those Internet exchanges than any of its peers, meaning a significant chunk of Internet traffic runs through an Equinix data center at some point on its journey. In a U.S. market with few big operators, the company controls more than 20% of the revenue from multitenant data centers, according to research firm Frost & Sullivan.
The company makes most of its revenue by charging tenants for the space needed to site their servers. It also charges tenants as much as $300 a month to maintain each link to other customers. Business tied to these interconnection fees—which account for more than 15% of Equinix’s revenue and an even bigger share of its earnings—is what has led some Internet engineers to push cheaper alternatives under the rubric Open-IX, for open Internet exchange.
Open-IX Chairman David Temkin, who also runs the network at Netflix Inc., argues that some Internet exchanges already enjoy an “untenable amount of control over the market” in U.S. cities.
The engineers’ complaints reflect a common view of the Internet among many technology workers who treat its plumbing as a resource atop which businesses can profit rather than a business in its own right.
Open-IX sets standards and has a certification program that makes it easier for competitors to offer services at Equinix’s level. The group is also pressing data-center companies to make their interconnection prices public so tenants know where they can get a deal.
One result is the new, nonprofit alternatives to Equinix that have already popped up in several U.S. cities. They include outposts set up by London Internet Exchange and German exchange operator De-cix, which are both owned by the Internet companies that use them.
“We’ve seen prices adjust across the board and across the nation,” said Akamai Technologies Inc. network architect Martin Hannigan, the group treasurer. “So there’s competition where there was none before.”
The risk for Equinix is that departures could snowball. The company itself has warned in regulatory filings that losing big “magnet” customers could prompt other, smaller clients to abandon its centers.
That hasn’t happened yet, and company executives have cast doubts on the ability of new Internet hub operators, many from Europe, to effectively compete with long-established Equinix centers. Chief Operating Officer Charles Meyers told investors during a July conference call that the group hadn’t caused “any meaningful impact in our business.”
Some tenants consider Equinix’s growing size an advantage.
“We can send in requests to get things done, and they get it done,” said Mike Leber, the chief executive at Internet service provider Hurricane Electric LLC. “When you request something in Zurich, you can request the same thing in Singapore.”
The company told investors earlier this year it should grow about 10% a year for the foreseeable future, a dramatic slowdown from rates that topped 40% a few years ago. Analysts say the slowdown is the result of a cluster of rivals that have sprung up over the past decade.
“It’s a slightly more competitive market,” said Timothy Horan, an analyst at Oppenheimer. “There’s not a lot of barriers to entry to someone just building a building.”
Write to Drew FitzGerald at firstname.lastname@example.org