Video streaming, business software platforms and even banks: increasingly, they run off the cloud services of Amazon, Microsoft and Google. The tech giants house all those servers in gargantuan, windowless hangars built by companies like Compass Datacenters.
After buying its way into Montreal last summer, the Dallas-headquartered firm has big plans. Backed by one of Canada’s largest institutional investors and one of the country’s richest families, it wants to increase its presence north of the border as part of a projected US$3-billion worldwide expansion. Said Compass International president AJ Byers, “We’re going to see demand [for] cloud services in every city over time.”
Compass Datacenters has a US$3-billion expansion plan, including more growth in Canada following its July 2019 acquisition of Montreal’s Root Data Center. The Dallas-headquartered firm, backed by the Ontario Teachers’ Pension Plan and the Azrieli Group, is looking to double its capacity in the next 24 months.
There’s a growing market in Canada for so-called “hyperscale” cloud—the term used to describe the biggest players, like Amazon Web Services—according to Philbert Shih, managing director of Toronto-based Structure Research. “The demand is coming from across the board—independent developers, mid-sized organizations, even the enterprise,” he said. “[It’s] a more recent development, but one that is … accelerating and has a lot of growth on it.”
Structure estimates that the seven hyperscale firms made US$73.9 billion in cloud revenue globally in 2019, including US$876 million in Canada. It predicts the Canadian market will hit US$5.9 billion in 2023, growing faster over that period than the significantly larger ones in the U.S., U.K. and EU.
That demand—and the needs of companies that have proprietary servers—means big business for data centres.
Compass puts up or buys buildings, then adds power connections, generator backups, cooling systems and physical security. Customers bring their own servers and network connections. Founded in 2011, it’s a relatively small player in the field; across facilities in Columbus, Dallas, Virginia’s Loudoun County, Phoenix and Montreal, it currently has over 100 megawatts (MW) worth of built capacity, and agreements with utilities to provide another 300 MW as it grows (data-centre hardware uses a large amount of energy, and the size of firms and facilities is often measured in terms of power). Equinix, one of the largest publicly traded data-centre companies with US$5.07 billion in 2018 revenue, has 113 MW in the Washington, D.C. area alone.
But Byers claims some of Compass’s data centres are 20 per cent more energy-efficient than the sector average because of features including special air-cooling technology. The company also builds faster than its competition, and typically doesn’t house multiple clients in a single building. It also allows some customers to take control of a facility once it’s built, instead of managing it for them.
“Compass has always been known to be an innovator when it comes to data-centre design [and] supply chain,” said Shih.
The Ontario Teachers’ Pension Plan (OTPP) first invested in Compass in 2016, and now owns a 54.5 per cent stake in the firm. (Compass is privately held, and does not disclose financial figures.) “The company is a good fit for our portfolio because it is a leader in a large and rapidly growing industry with strong market fundamentals,” said Jane Rowe, executive managing director of equities. “We like their stable, low-risk business model that has infrastructure-like characteristics.” She said OTPP plans to continue investing in Compass as it expands.
The firm’s newest backer also has strong Canadian ties. In July 2019, Israeli real estate developer Azrieli Group—controlled by the Montreal billionaire family of the same name—invested US$135 million, getting 19.5 per cent of the company and the option to grow that to 33 per cent by December 2020. Azrieli and Compass’s third major investor, U.S. private equity firm RedBird Capital Partners, did not respond to requests for comment.
Compass came to Canada in July 2019, when it acquired Root Data Center, which has two Montreal facilities with a combined current capacity of 35 MW. The low cost of electricity in the province makes it an attractive location for power-intensive server farms. Data centres get “about $1 million a year per megawatt of operational savings by being in the province of Quebec versus Ontario,” said Byers, who was previously Root’s CEO. OTPP’s Rowe called the deal “a strategic way for Compass to enter the Canadian market.”
The Root acquisition was the precursor to the massive expansion on which the company is now embarking. “We expect to see both contracted and available capacity double via acquisitions over the next 24 months,” said Raymond Hawkins, chief revenue officer.
While Compass is planning to expand in Montreal, it expects its geographic footprint to continue to grow, as well. Most online services don’t require the user and the data centre to be particularly close together, so theoretically, “you can service all of Canada out of that single market in Montreal,” said Byers. But that’s changing. “As applications become more sophisticated, performance and speed becomes more important, [and] you will see that increasingly when it comes to things like gaming, for example, localized infrastructure becomes more important,” said Shih. Over-the-top-video platforms like Netflix and database applications like Salesforce also require quick data retrieval.
“We are working on multiple projects in Canada for potential customers, [as well as] multiple regions in the U.S. and in a couple of regions in Europe,” said Byers.
Compass would not disclose the names of its clients, citing non-disclosure agreements. “The top 50 to 60 technology companies in the world are the profile of our target customer,” said Byers. However, the company did reveal that in Canada it is working with hyperscale cloud service providers, gaming companies and mid-sized and large technology firms.
Byers predicted demand will be highest in regions with large populations and lots of enterprise organizations, naming Toronto, Calgary and Vancouver. “We are seeing significant demand (say >10MW annually) in major Canadian cities,” he said in a follow-up email.
Other major U.S. operators are already in Canada. Equinix and Digital Realty, another publicly traded firm, both have facilities in the Greater Toronto Area. Toronto is already a bigger market than Montreal, according to Structure, with data-centre spend in the cities totalling US$316 million and US$153 million in 2019, respectively.
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Customer retention is high in the data-centre business. “It’s very difficult to move infrastructure,” said Shih. Three- to five-year contracts are standard, and hyperscale customers typically sign five- to 10-year deals. And the model will continue to make sense for hyperscale customers as they grow. “Instead of sinking [capital budgets] into building your own data centre, you let the vendor do it for you, and buy the server space,” he explained.
It’s still early days for the data-centre industry, Shih said. “Digital is going to take over, and there’s so much growth left.” Compass hopes to be along for that ride. “We are in acquisition and growth mode,” said Hawkins.