It sounds like the ultimate impulse buy. Last week Google revealed it had placed a $51.7m bid for a defunct paper mill in the remote reaches of southern Finland. The mill, closed since January last year, is located in the tiny border town of Hamina (population, 21,576). It was disbanded after a long fight to stay in business in a local industry facing terminal decline. While bargain hunting for cheap assets has become a feature of the credit crunch, investors may ask what on earth Google is planning to do with a defunct paper mill.
The answer is: turn it into a hotel. But this will be no luxury five-star retreat – it’s an internet hotel. It will join the growing list of places where Google stores the videos you might call up on Youtube. And right now they are in hot demand. Youtube alone, for example, generated more internet traffic in 2006 than the entire internet in 2000. Google will initially stuff the former paper mill with huge rooms humming to the sound of densely packed computers. Once transformed, the mill will power Google’s web servers and store vast quantities of information.
In recent years, government rules that force firms of all kinds to back up data have helped drive a boom in demand for these storage centres. Many firms – from banks and biotechs to telecoms, anything that controls big streams of data – have found it too expensive to run remote data centres themselves, and so increasingly farm the work out to specialist companies who then provide offsite ‘hosting’.
As banks downsize, offices in the City and Canary Wharf may be a lot quieter, but that hasn’t crushed demand for data centres from financial services firms. Banks, after all, still have a lot of data to process before they work their way out of the current mess. Meanwhile, industries such as biotechnology still need somewhere to store vast quantities of research. In November, Tier 1 Research noted that demand for data-centre services is growing at twice the rate of supply.
Indeed, the recession is creating new demand from firms trying to slash their IT bills. Typically, businesses can save at least 30% of the cost of running a data centre through outsourcing, according to Michel Boussard of data-centre group Interxion. That’s a significant cost saving, given that consultancy Broadgroup reckons the annual cost of running the average British data centre will more than double to £11m by 2010. Demand is so high that an entire mini-industry developing technology that can make data centres more cost efficient has quickly emerged, says Mark Veverka in Barron’s.
Adding to this pressure on data storage is a lack of new capacity. It can cost between $1,000 and $2,000 per square foot to construct a data centre, which often equates to a ten-to 20-year investment, Online Tech CEO Yan Ness told Michigan Business Review. The trouble is, the majority of data centres across Europe have already reached 80% of capacity, according to telecoms consultancy Broad Group.
And giant telecoms and banks are not the only clients. We are, indirectly, as well. As we stay in to watch films on the internet during the recession, we are adding to the demand on data centres. Meanwhile, applications such as video-on-demand require huge amounts of back-up storage. So while IT spending overall will drop this year, independent companies running data centres still look like solid defensive plays. We have a look at two below.
The two best bets in the data storage centre sector
Iomart (Aim:IOM), first tipped in May 2007, has long been our favourite play on the demand for data centres. As Paul Hill noted in MoneyWeek two weeks ago, Iomart may be small, with just four data centres in Britain, but it is profitable, has plenty of cash, and looks like a takeover target.
Another takeover target in data storage is American outfit NetApp (Nasdaq:NTAP), according to Mark Veverka in Barron’s. NetApp provides data-storage technology that helps firms manage their data centres more efficiently, supplying software to store documents, emails and videos. This technology not only stores but retrieves data quickly – useful if the Securities & Exchange Commission comes knocking. This part of the industry isn’t recession-proof. But NetApp’s unique product will see it outpace the rest, says Veverka. It has a very healthy core client – the government, which accounted for 16% of its $3.3bn in revenues last year. It also has $1.2bn net cash. The firm is currently cutting jobs, having increased its sales force by 25% before the recession. But on a forward p/e of 13, and with five-year annual sales growth of 23%, “NetApp is ripe for picking” by the likes of IBM, HP and Dell.