FOCUS SILICON VALLEY
Issue 9, April/May 10
SILICON VALLEY SEES IMPROVED DEMAND Still, growth may be slower than elsewhere because of California’s high taxes and expensive power
the worldwide high-tech industry’s direction for the past several decades, has been affected by the worldwide economic downturn more than its leaders expected.
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According to the latest Silicon Valley Index – an annual assessment of the region’s economy published by Joint Venture (a non-profit organisation that lists many of the Valley’s key community and business leaders as members) – the region is facing a steep climb back out of its current state.
“Two years ago we told you there were some stiff winds starting to blow outside our region and that they were making their way here,” said Russell Hancock, Joint Venture president and chief executive. “But we also suggested that perhaps Silicon Valley would be immune to those pressures, and that we had special forms of insulation.”
One year ago, the storm arrived to the Valley and it turned out the region was not so immune. “If there is a theme coming out of the index this year, it would be that we’ve been slammed. We’ve been slammed by these forces and Silicon Valley’s innovation engine, for now, has stopped firing.”
The index offers some sobering facts: loss of 90,000 jobs in the region between the second quarter of 2008 and the second quarter of 2009, falling per-capita income, a drop in the number of patents registered by Silicon Valley companies, a drop in venture capital investment and staggering office space vacancy rates.
DEMAND KEEPS UP Obviously, data centers have supplied the infrastructure that has supported the Valley’s high-tech sector. Data center providers big and small have traditionally thrived in the region and today, with demand for data center space around the country outpacing supply, they are largely optimistic.
John Sheputis, co-founder and CEO of 24
www.datacenterdynamics.com
Fortune Data Centers, a San Jose-based provider of wholesale colocation space, says that while deal volume has dried up over the past two years, he believes there are definite signs of improvement.
These days, expansion in the sector, traditionally constrained by cautious investors, is driven largely by equity, and Sheputis says there is equity available. “There are definitely a lot of private equity people who are putting significant investment in the data center sector.”
What makes Silicon Valley tougher than other markets is California’s high-tax environment and relatively high cost of power. The latter factor has a silver lining, however. “The cost of power is such in California that the most efficient data centers are also here. The payback is so much better for energy.”
Another perhaps comforting notion for Silicon Valley’s industry is that some major US data center companies are either based in or near the region, or have a presence there. They include Digital Realty Trust, Equinix, Savvis, NTT America and Quality Technology Services.
STAYING COMPETITIVE QualityTech’s chief marketing and business officer, Tesh Durvasula, said the company sees its presence in Silicon Valley as part of remaining competitive in the market. The company started selling the first 27,000 sq ft phase of its Santa Clara colocation facility in
ilicon Valley, the unofficial California region that has consistently churned out companies that have set
the summer of 2009. The provider’s other markets are Atlanta, Miami, New York and New Jersey.
Because of taxes and power rates, QualityTech is expanding much more rapidly in other markets, while moving cautiously in California. “In that regard, the state of California is not helping itself,” Durvasula said.
“We know we need to be in Silicon Valley, but I can also take a big bet on Atlanta, Georgia, and not really worry about the implications,” he said.
In October 2009, the company announced a plan to double the existing 200,000 sq ft
space in its Atlanta facility. If things continue on their current trajectory in Santa Clara, QualityTech will proceed to double the space there, but that space’s size pales in comparison with the expansion in Atlanta.
Compared with other regions, Silicon Valley has been a tough talent market for QualityTech because of the high cost of living and the large number of other companies competing for candidates. The recession has made attracting talent easier. “Not that it’s good for Silicon Valley. It’s certainly been a boom for companies such as QTS.”
Tom Wye, president and CEO of Bay Area Internet Solutions, a retail colocation provider with a new data center in Santa Clara, said demand for colocation space in the region has not let up. “Large customers are sitting on the sidelines, waiting for space to become available.”
As the market continues recovering and enterprises increasingly look to outsourcing, Sheputis predicts there will be continued expansion of Silicon Valley’s data center sector. He does not foresee any significant shifts in the amount of demand, or in the pricing of data center services.
“We’re seeing lending return slowly,” Sheputis said. “All of the major competitors are dusting off their building plans. Our biggest challenge at the moment is finding the money to build this stuff, which has been hard to come by.”
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