Edge Computing Necessarily Drives Additional Interconnection Demand

The definition of “interconnection,” and “interconnection revenue” in the data center space might be changing, especially as edge computing grows.

Traditionally, such functions might mostly have been applied to in-building connections between servers. In such instances, even when there was a fee for such connections, the operations fell clearly within the realm of local area networking. 

Edge computing pushed connectivity needs out from the hyperscale and tier-one data centers to many local edge connections, by definition increasing the necessity of additional interconnectiions. And it does not stretch credulity to argue that non-traditional connectivity service providers including data centers themselves will benefit.

Today, interconnection increasingly refers to operations and potential revenue connecting servers and buildings across public networks or wide area networks. Equinox, for example, reported 2022 full year interconnection revenues representing about 17.5 percent of total revenue. 

Granted, much of that revenue comes from in-building cross connects, not “outside the building” connections between data centers, peering or interconnect locations. In the following chart, amounts are in dollars billion. So Equinix in 2022 earned about $1.27 billion in interconnection revenue. 

Assume 47 percent of that was earned supplying cross connects inside Equinix facilities, suggesting $597 million in such revenue. That leaves about $673 million in wide area network or access network interconnection revenue. 

source: Equinix 

Back in 2020, Equinix said Equinix Fabric, one of the firm’s “outside the building” connectivity lines of business, represented about 10 percent of total interconnection revenues. But that part of the business has grown. “Virtual” connections were said to be growing at about 32 percent annually.  At such rates, 2022 contributions from that source could have reached 17 percent or so of total interconnection revenue. 

But Equinix has several product lines within the interconnection area. 

Equinix Fabric provides secure, on-demand, software-defined interconnection globally. 

The biggest current revenue driver is likely the Cross Connects service, which provides a point-to-point cable link between two Equinix customers in the same data center.

Equinix Internet Exchange enables networks, content providers and large enterprises to exchange internet traffic through peering points. 

Equinix Internet Access operates in 40 markets. Fiber Connect provides dark fiber links between customers and partners between multiple Equinix data centers.

Assume cross connects still represent as much as 47 percent of interconnection revenue. That also means as much as 53 percent of revenue comes from services that traditionally are provided by telcos, internet service providers or wide area networking specialists. 

Those products include lit fiber services, access to dark fiber, Ethernet transport or wavelength transport. 

The point is that Equinix earns a substantial amount of “connectivity” revenue as part of its data center services operations. 

source: Paolo Gorgo

Of note is the value Equinix, for example, seems to derive from its interconnection function. Where all “pure play”  connectivity suppliers grudgingly expect lower prices virtually every year as a main trend, Equinix seems to derive much more value from its interconnection services. 

To be sure, interconnection is not the primary driver of revenue. But Equinix experience also illustrates that some interconnections are deemed more valuable than others. 

source: Hoya Capital 

It is not unrealistic to predict that, with the growth of edge computing, interconnection will drive even more activity and revenue. 

 

According to Viavi, interconnection “refers to the technology used to link together two or more individual data centers to pool resources, balance employee workloads, replicate data, or implement disaster recovery plans and provide business data closer to the edge.”

Data center interconnections, in other words, are now distinct from in-building interconnections connecting campus locations up to about five kilometers; metro connections up to 100 km or traditional WAN connections spanning hundreds of kilometers. 

source: Viavi 

As always, infrastructure providers are direct beneficiaries of new needs for data center interconnections as they supply the appliances required to create the connections. Data center operators might monetize their DCI capabilities directly or indirectly, perhaps separately from in-building cross connects and peering. 

Tenants might be charged for use of ports or higher-level networking protocols, for example, whether direct (cross connects) or virtual (WAN connections).

Perhaps the point here is that interconnection revenue seems to have higher value in the context of application and computing performance, compared to more generic enterprise data networking. 

For an industry perpetually concerned with declining profit margins caused, in large part, by perceived commodity status, the higher value apparently connected with Equinix ecosystem connections is significant.