India losing out data centre business to small nations

India is miles away from becoming a global data centre hub even though the country has been the world’s backyard for IT and back-office services for many years.

Infrastructure bottlenecks, the precarious power situation and outdated telecom policies have resulted in the country losing out business to smaller rivals such as Singapore, Hong Kong and Taiwan.

At present, none of the Internet biggies — Google, Amazon or Facebook — host their data centre in India. Yet Indian companies that provide these services on an outsourced model are shoring up plans to augment capacity. What is driving this optimism?

A data centre is a facility used to house computer systems and associated components such as telecommunications and storage systems. Companies have data centres in-house, run them as captive units, or outsource them to specialist players such as Tata Communications, Netmagic, CtrlS, Sify and others.

According to the recent Asia-Pacific Data Center Index study published by IDC, Hong Kong is the most suitable location in the Asia-Pacific region for setting up data centres. Singapore and Taiwan are the second and third most preferred locations.

P Sridhar Reddy, CEO of CtrlS, says Hong Kong and Singapore score because of cheap bandwidth, strong infrastructure and low-cost of capital. Data centres are power-hungry units that are heavily dependent on uninterrupted supply. Some large centres consume as much electricity as a small town.

In India, there are other general concerns around enforceability of contracts and law and order, which deter Internet companies from setting up server units, says Reddy.

The high cost of Internet bandwidth, considered the lifeline of the data centre industry, is another impediment. Though bandwidth costs have reduced in recent years, it is still higher than most western countries.

According to the International Telecommunication Union’s annual ‘Measuring the Information Society’ report, the cost of an entry-level broadband plan in India is equivalent to 5.5 per cent of an Indian’s per capita income. In comparison, a similar plan accounts for 0.5-0.8 per cent of per capita income in countries such as Singapore, the US and the UK. India also falls behind countries such as Sri Lanka (2.9 per cent) and Malaysia (3.2 per cent).

“As a result, several Indian portals still find it cheaper to host their applications in the US, despite over 90 per cent of their user base being in India,” says Mandar Kulkarni, Senior Vice-President, Solution Engineering and Private Cloud Practice at NTT Communications-owned Netmagic Solutions.

Singapore ensures that very good quality of bandwidth is available through its telecom companies, at competitive rates. As a result, the tiny island has more data centre capacity than India, says Reddy.

The other big issue is that of charges related to cable-landing stations, which are the points at which submarine cables (optical fibre cables that carry Internet traffic) enter and exit the mainland. Station owners often impose hefty fees for allowing Internet service traffic to pass through.

The market is dominated by two players who together own over 80 per cent of the pie and, hence, command pricing power, analysts say.

A small country like Singapore had 15 landing stations in 2010, data show.

Interestingly, some of these challenges seem to be pushing third party data centre firms to reinvent themselves. Some outsourcing providers such as Netmagic are experimenting with wind energy for part-powering their units.

The demand, they say, is coming from home-bred companies and India-focused units of international companies. Many of these companies are working with a third-party player for the first time. This seems to be making up for the lack of international demand, at least for the time being, analysts add.

“Organisations have realised that with the rising cost of power and real estate, it makes much more sense to outsource to data centre providers than to build their own data centres,” says Varoon Raghavan, Assistant Vice-President, Growth Ventures, Tata Communications. Reddy concurs, adding that The India units of three international banks recently shut their in-house data centre and moved them to CtrlS’ premises in Navi Mumbai.

The cost angle also counts. Outsourcing upwards of 150 racks can result in cost savings of 40-50 per cent, say analysts.

Adds Netmagic’s Kulkarni: “Diesel-based generator sets are a must because of power outages. In order to store diesel for 48 hours, a different licence is required, which adds to the headache of companies, and hence they are more keen to outsource.”

The need of the hour for India is to have a separate pricing strategy for commodity purchases of energy for data centre purposes, he says.

Gaurav Sharma, Research Manager-Enterprise at research firm IDC, says the emergence of the third platform is also contributing to an increase in domestic server capacity.

IDC deems that the third platform of computing — social, mobile, cloud and big data — is transforming IT much faster than the first (mainframe), or second (client/server) platforms ever did.

“The increasing traction of cloud and enterprise applications will drive growth in data centres for the next two-three years. We do not expect a corresponding increase in the new build-up of floor space, as providers will drive greater utilisation of existing floor space,” says Sharma.