How data centers make money

Last June 14, a company named NTT Global Systems Data bought a 102-acre wooded patch between I-66 and John Marshall Highway in Gainesville. The property had been assessed at a little under $12 million, but NTT, a data center operator, paid $270.4 million, or $2.65 million per acre. 

That might seem crazy, but such land buys are par for the course in Northern Virginia. Data centers are willing to pay top dollar for parcels close to the high-powered transmission lines and fiber-optic cable nodes they need. And data center companies have the money.  

How much money data centers make is a well-guarded secret. But one industry-tracking website, Statista.com, projects worldwide revenue of $341 billion in 2022, with about a third generated in the United States. Among the big players is Amazon Web Services, a branch of Amazon.com, whose application to build a data center in Warrenton may be voted on Tuesday, Feb. 14, by the Warrenton Town Council. 

AWS had worldwide sales of $67.2 billion in 2021, according to its SEC filings, and showed an operating profit of $18.5 billion. One crude calculation based on dollars earned per square foot of building space indicates that a medium-sized AWS center could generate $100 million or more in profit annually.

Perhaps more stunning than the profit numbers is AWS’s sales growth. Its federal filings say sales were up 37% in 2021 over 2020. Profits shot up 10 times between 2015 and 2021. And profit margins for the web services division of Amazon were huge– nearly 30% in 2021, as opposed to 5.2% for the whole company. 

The roots of this bonanza are found in the global data explosion. According to a graphic presented by Digital Crossroads, a data center operator, every minute of the day 400,000 apps are downloaded worldwide, 4.1 million search queries hit Google, and $1.1 million is spent shopping online. 

This creates an ever-increasing volume of data that must be stored, linked and processed somewhere. Meanwhile, more and more companies that used to handle their own data are now contracting the work to data center companies. Banking, online shopping, video-streaming, gaming and more – all are migrating to what is loosely called the Cloud.

Data centers mean business

AWS, for instance, offers 238 products to suit business needs. The company provides options for pure data storage and retrieval, and a combination of services to run businesses – from interfacing with the public online to storing product information to customer fulfillment. AWS’s products can help clients store and analyze health data, make and monetize videos, detect fraud, catalog and analyze financial data, or build their own data storage warehouse. 

Let’s say someone wanted to start a business selling car repair videos. If they expected up to 500 users on their site, planned to store and access three to nine terabytes of data, and wanted to use a web-based front end and customer interface, the cost of AWS’s services would come to under $2,200 a year, according to AWS’s product-pricing calculator. 

On the other end, if an insurance company wanted to store 500 terabytes of data – a huge amount--it would pay AWS $11,000 a month, or $132,000 a year, for the storage, according to the website. That may seem like a lot of money, but if an insurance company is running its own data center, its costs would well surpass that amount. So many big companies are farming out their data processing, storage and retrieval to data center companies.

“If I’m a CEO, I am always looking at ways to cut costs,” said Mike Fultz, a Fauquier information technology consultant. “The cost of buying back-end storage is still cheaper than doing it yourself.” 

All this is done in huge windowless buildings packed with computer equipment. The buildings hold servers, which are small but powerful computers, data storage units like disc or solid-state drives, and switching units that connect functions to other functions, either in the same building or via the internet.

In most centers the servers and other devices are stacked in slots on 19-inch-wide racks like “pizza boxes,” as Fultz put it.  A modest-sized data center of, say, 200,000 square feet may contain thousands of  “pizza boxes.” 

Interestingly, a company does not lease a particular server. To optimize performance, data center management may move the software around, so a client’s programs may be running on a server in row 35 one day and in row 104 the next. For this reason it is impossible to attach what a customer is paying to a piece of hardware, and even harder for an outsider to assess how much money a piece of equipment earns for the data center.

Why are the centers so big? Going big allows for economies of scale. The companies can realize savings when they buy or build massive amounts of equipment – some spend $1 billion. That produces a windfall for local governments, which can tax business property. With thousands of servers and computers in one building, personnel management costs are cheaper. 

And the vast amount and arrays of equipment give them enormous flexibility,  like being able to ramp up operations at Christmastime, said Fred Smith, a Fauquier resident who worked for NTT and ran a data center in New York City.  

Data centers use various business models. Some may serve governments, federal and local, whose contracts are valued for their longevity and dependability of payment. More serve commercial users, either by providing single services like storage or a suite of services, as AWS does.  

But customers may also lease space in a data center for their own equipment, a practice known as “co-location.” Fultz worked with an organization he declined to identify that rented a locked space, or “cage,” in a data center in Ashburn. His agency provided the computers, while the data center provided electric power, network wiring, security and cooling.  

Some 2,200 companies worldwide offer colocation services. Equinix, which has 240 locations in 27 countries – including 18 in Northern Virginia – specializes in co-location of interrelated businesses. It says in its federal filings that it realized $500 million in net income on $6.6 billion in sales in 2021. 

Amazon jumped in ‘big’ to data centers

According to the former Amazon manager, the giant retailer had been running its own data centers to support its online business. It saw how expensive that could be, but that spawned an idea: if it could provide those services to others at a good price it could make a lot of money.  

And so, in 2007, the company decided to jump in big. Amazon invested heavily and dominated the market. Fifteen years later they still dominate: AWS’s share of the market is 34%, followed by Microsoft Azure at 21% and Google Cloud at 11%.

According to Amazon.com filings, the AWS segment generated only 13% of total company sales in 2021. But AWS margins are much higher than the retail business. In 2021, AWS’s operating income margin was 29.7%, while the retail business ran at under 2%. 

AWS now owns 41 data centers, of which 32 are in Northern Virginia, according to a data center information website and Bill Wright, a Prince William resident who tracks local centers and opposes what he sees as sloppy county planning. Four Amazon data centers  are in Prince William County, where up to five more are under development. 

But according to Dgtl Infra, a website that tracks data centers and related IT infrastructure, Amazon operates as many as 125 centers worldwide, including ones in Europe, Asia and the Middle East. The difference between 41 that Amazon owns and 125 that it operates may be because AWS leases more of its building space than it owns, according to its SEC filings. 

AWS now wants to build on Warrenton’s Blackwell Road. Last November its land-use lawyer, John Foote, assured town officials that the project would not engage in co-location or anything speculative, because it already had a client needing its services.

In 2013 Amazon won a $600 million contract to provide Cloud services for the CIA and 17 intelligence agencies. The Warrenton Training Center, two miles from the Blackwell location, is known to include a CIA training facility. That was to be a 10-year contract,  though it is not clear whether it was extended. Meanwhile, the U.S. Department of Defense just announced that Amazon would share with three other Cloud giants – Google, Microsoft and Oracle – a $9 billion Joint Warfighting Cloud Capability contract.