Last year, CyrusOne CEO Eric Schwartz joined the company and, with his experience, brought a bold vision. Recently, Eric had an insightful conversation with CyrusOne Co-founder Dave Ferdman during the Datacloud USA conference in Austin, Texas, discussing the state of the data center industry and CyrusOne's accomplishments over the past year. They delved into a comprehensive recap of recent advancements and offered a glimpse into the exciting future of data centers.
After one year at CyrusOne, what's your biggest takeaway?
It has been a very fast year in many ways. Like many industries, the data center industry is changing rapidly, but fundamentally, our business centers on serving customers. CyrusOne has earned a strong reputation for being responsive to customer needs and requirements, and it is important that we continue to build upon that platform even as technology, capital markets, regulation, and other elements of our business change.
How has the current demand changed the strategy of the company?
An easy place to start is artificial intelligence. Artificial intelligence has been around for quite some time and there have been artificial intelligence deployments at CyrusOne and many other places going back a number of years. The introduction and adoption of ChatGPT, which is the fastest-ever adopted application, along with other intelligence platforms from hyperscalers, startups, and many companies in between, has accelerated the development and deployment of the technology and added a new wave of demand for the digital infrastructure that CyrusOne develops and operates. And even as artificial intelligence drives new demand, cloud, internet, and enterprise IT platforms continue to grow. We remain committed to our core strategy of delivering high-quality, digital infrastructure at large scale to sophisticated technology customers in major markets. Given the scale and shape of current demand, we are adapting that strategy by increasing our capacity, expanding into new markets such as Japan, and extending our product and service capabilities with Intelliscale™ and other initiatives. I'm particularly excited about Intelliscale because it showcases our company's technical expertise and ability to keep up with, and ideally stay ahead of, customers' evolving requirements in a way that differentiates us from competitors.
With the public-to-private transitions of several platforms, what has that done for the company?
The take-private of CyrusOne by KKR and global infrastructure partners, GIP, happened shortly before I joined, so I've really been part of the company under that structure. Most importantly, our structure as a private company enables us to focus on building long-term value at CyrusOne. We are investing across the company at an aggressive level that would be difficult for a public company to undertake. The support and engagement of KKR and GIP is essential to executing our growth plans. In addition, KKR and GIP provide us with a wide range of business resources that we use in support of our growth. We have professionals from KKR and GIP embedded in different departments to add expertise and tackle key issues in our business. Finally, investment by KKR and GIP in CyrusOne builds our brand. While some prospective customers may not have heard of CyrusOne, they are all familiar with KKR and GIP. Our position in both firms' portfolios is a strong endorsement of our company's capabilities and staying power, and it gives us increased credibility in a crowded marketplace.
With this change in strategic partnership, has the focus shifted to more second-tier markets?
Our focus continues to be on major markets where we can serve a number of customers and build our operational scale. Most recently, we started construction in Madrid and Quincy, Washington as new markets, and our recently announced joint venture in Japan is another big step for us. While it is exciting to add these new markets to our company platform, our investment continues to be concentrated in key markets such as Northern Virginia, Frankfurt, Chicago, Dallas, London, and Phoenix.
Can you tell us about the partnership with KEPCO and the competitive landscape in Japan?
We're very pleased and happy to be partnered with KEPCO on the launch of CyrusOne KEP. We went through quite a bit of work evaluating both the Japanese market and where CyrusOne could position as well as working with the team at KEPCO on a shared vision for what the joint venture can and should become and what those opportunities will be. We're a number of months into it, and the culture and the tone of the joint venture are highly constructive and aligned. I'm very pleased with the progress we've been making with KEPCO and their selection of us as a partner and our selection of them. Japan is one of the third largest data center markets in the world after the U.S. and China. But like other markets, there are challenges in finding land, securing power, and securing equipment. The combination of CyrusOne and KEPCO brings a very capable new competitor to the market. There's strong demand for cloud services and future AI technologies, so I think we will be very well-positioned to meet some of that demand and accelerate infrastructure in Japan.
Switching to AI, do you see AI as a hyperscale movement primarily? How is it going to impact the hybrid cloud?
Hyperscalers got that name because they operate at such a massive scale. And everything I've seen says that they're positioned to scale artificial intelligence technology in the same way that they've done in the cloud. So just by the very nature of who those companies are, their customer base, and the breadth of activities that they're in, I think they're going to build and construct platforms at a scale equal to or larger than anything we've seen in the cloud which, in turn, presents a great opportunity for the data center industry. The hyperscalers are all extremely successful, very market-aware companies, so I put a lot of credence in their enthusiasm and their investment commitments. As relates to the hybrid cloud, people are going to look for how to connect hybrid clouds to AI platforms, whether those are hyperscale platforms or otherwise. And we're seeing that. There are deployments going to the major cloud hubs in Northern Virginia, Chicago, Dallas, Phoenix, and other locations, including the West Coast. AI platforms are inherently data-hungry, so I expect AI platforms to be drawn to the clouds and vice-versa which will give rise to hybrid AI. The linkages between these platforms reinforce our strategy to invest in major markets that continue to be substantial hubs for clouds, public, private, hybrid, and otherwise.
Can the design be the same or does the design requirement for everyone in the industry change?
Data center design has been evolving steadily over the past years. As an example, CyrusOne, partly because we operate in Phoenix, made a very strong commitment to start operating only on closed-loop water systems to conserve water and not be a large consumer. And we've evolved our fleet dramatically to a closed-loop architecture. Years ago, open evaporative systems were popular because they would reduce power consumption and there was less appreciation for the associated impact on the water side. So now as AI grows in scale, designs are going to evolve. We've been hosting and supporting high-density liquid-cooled installations for a number of years. And there's a lot to learn about that. The Intelliscale announcement said that we are prepared to support densities up to 300 kW per rack. That's valuable because the densities are growing, and they're not just growing because we can. There are performance drivers that necessitate densities at that level. And what we've experienced and learned, and are continuing to share with customers, is that increasing density isn't about just cooling the chip. There are a host of design and operational implications of operating at these high densities. It doesn't have to be 300 kW per rack; it can be 50,100, or 200 kW per rack. Our learning and our focus are very much about evolving the entire design of the equipment specifications, the size of the building, the control strategy, and the operations strategy to ensure that we're still delivering a full and robust service above and beyond just being able to cool and deal with some very power-hungry equipment.
Given the rising demand, what are the sustainability metrics? What are you most proud of regarding those metrics?
I'm proud of several things. I'm very proud of what we've accomplished on managing water consumption in Phoenix and other markets. Water, in a number of ways, is potentially a scarcer resource than power, and being good stewards around water usage for the communities that we're part of is an important step. On the power side, we're working on metrics that capture how much power we source from renewable sources, how much power we offset with certificates as well as overall efficiency. We're certainly expecting that these higher dense deployments will get us to a higher efficiency as well which is a parallel benefit. We're expanding our view of sustainability to go beyond power and operating efficiency. For example, we now measure the amount of waste that goes to a recycling destination versus a landfill. We're seeing the percentage that gets diverted to recycling steadily rise with the cooperation of our customers, and that is absolutely the right trend as we move forward.
What is your opinion of alternative energy?
I think the picture differs by where you are. And so here in the U.S., the recent Inflation Reduction Act provided a lot of strong incentives for renewable development. Certainly, CyrusOne is not planning to become a renewable energy plant developer, but we are working closely with a number of renewable energy de
velopers to link their developments to our facilities, either directly or across the grid. The stable, baseload demand that we can provide them helps to make their projects more financeable. Done right, it's a win, win, win - a win for us, a win for them, and a win for the broader environment. Europe is different. Developing large-scale renewable projects is more challenging in most cases. We're exploring opportunities for that, but we don't see the volume of opportunities there that we've seen in the U.S. We're waiting to see when and if small-scale nuclear power will become feasible and under what circumstances because permitting is as big an issue as technology. Regardless of technology, I expect more and more sites, whether they are ours or others', will end up with their own dedicated generation capacity.
How do you communicate ESG goals?
ESG is a fundamental requirement for dealing with large-scale customers. CyrusOne has implemented a full program to define the areas where we're going to focus and to report on them - areas where we made progress and not.
How do diversity and inclusion align with the company's broader ESG goals and strategy?
Having joined the company a year ago, building diversity and inclusion within the company was a key area of focus for me. At that time, the company was still emerging from the COVID pandemic and remote work. It was really important from my perspective to build the culture and the commitment across the team that's going to carry us forward, and diversity and inclusion are essential to that. The executive team that we have today is more diverse than it was a year ago. That's great because we've added some extraordinarily talented people to the team, and people across the company now see people that they can identify with more so than in the past. We're going to continue to press on in that direction.
What's the vision for sustainability?
From a sustainability standpoint, I'd love it if there were a silver bullet that would solve it, but I think progress is going to take relentless focus and improvement, and we're on that path.
How are you solving construction challenges that come with entering into new markets, or expanding in existing markets?
One of CyrusOne's strengths is our supply chain. That's both on the equipment side and the construction side. We're well positioned because, as we enter a new market, we're assessing demand and we're also assessing our supply chain and our ability to extend it. We mentioned Japan earlier. A number of the relationships that we will leverage in the Japanese market are linked to relationships that we have in the U.S. and European markets. We will continue to invest in building partnerships with the participants in our supply chain. Our annual supplier conference is the benchmark for the industry and has served us extraordinarily well.
What do you think about fiber networking? Is it possible to address power constraints and other issues with a superfast network?
The answer is yes and no. There's undoubtedly a set of applications where advanced photonics will help, but I don't foresee the speed of light getting any better. And as a result, there is a set of applications that will continue to need proximity that brings together the right resources in a particular location even as fiber networks continue to build out and add capacity.
Any final thoughts?
These are exciting times for CyrusOne and the data center industry as a whole as we sit at the crossroads of the primary technology trends of our time. What defines our company is not generators and chillers (although those are critically important) but people. My goal is to continue to build a world-class team of CyrusOne professionals dedicated to serving customers and supporting each other. We are headed in the right direction but have more work to do.