There are very few things that grow in perpetuity, but data is one of them. The chart below was created by IDC, but this chart has seen many iterations from many different sources. Every time we look at it, we take a minute to pause and think about what this chart actually says.
Just 13 years ago, there had been only 2 zettabytes of data created, replicated, and stored by humanity. What a zettabyte actually is may be hard for most people to actually wrap their heads around, so as a refresher a zettabyte is 1 trillion gigabytes… still with us? According to IDC, the world is expected to produce 120 ZB this year and next year that number will grow by more than 22%. The following year it will grow at an even faster rate. Frankly, these numbers could be conservative as Artificial Intelligence and Machine Learning technologies begin to ramp.
Ok, so why should we care and why are private equity players paying such close attention? One reason…reliability. Reliable cash flows can be levered heavily, and this allows private investors the opportunity to kick in tiny amounts of equity to purchase datacenters and drive return on capital numbers to the moon.
This strategy obviously works even better when rates are lower, but datacenters charge companies a rate per kilowatt hour and their gross margins are near 60%. This leaves a lot of room for compression of dollars per byte as determined by Moore’s Law before we worry about the returns getting squeezed by debt service.
But more importantly, Moore’s Law can no longer keep up with the growth of data. The buildings will be full, the servers will need to be serviced and swapped as time passes, and the real estate around these data hubs will continue to grow in value.