Cross-vertical enterprises are reassessing their data center strategies and cloud options driven by sustainability, energy, resilience, and legal concerns. Certain verticals (e.g., banking and finance) have pivoted toward a hybrid cloud model with less focus on the public cloud, but ABI Research believes that stricter regulation may be the answer to bringing these verticals back into the fold, but given hyperscaler opposition, this regulation must be consultative with significant incentives for compliance.
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Public Cloud Demand Will Be Increasingly Undermined by Reliability and Sustainability Concerns
Public clouds have always been dogged by security concerns from the financial sector. Its global, decentralized structure means that enterprises feel that they unaware of where and how their “sensitive” data are stored. In addition, the Bank for International Settlements (BIS) wrote about the “policy blind spot” that exists due to the increasingly prominent role of large technology firms in the financial sector. It highlighted the need for greater regulation and supervision of the interdependencies between big tech and the banking sector.
Alongside these ever-present security concerns, recent events caused in part by the U.K. heat wave have created a fresh wave of reliability and sustainability concerns. Google Cloud and Oracle servers failed on July 19 due to cooling issues; selected machines were powered off to avoid long-term damage, causing some resources, services, and virtual machines to become unavailable. Although 40.3° Celsius will not likely be a regular U.K. temperature, this failing has underpinned the infrastructure fragility, especially for verticals running life-critical use cases (e.g., healthcare, manufacturing, and financial). Reputations are being dented by negative press, and customers are moving back to on-premises servers. But tighter regulations may be the remedy and will help slow the enterprise migration.
Regulation Must Not Only Be Impactful, but Plausible, Given the Expected Opposition from Hyperscalers
In 2021, Europe’s Climate Neutral Data Centre Pact took a proposal to the European Union (EU) looking to proactively impose suitable climate regulations to enable the sector to meet the EU’s goals by 2030. The underpinning message is that the operators should be leaders, as the cloud and digital transformation can help support carbon neutrality through digitalization. Europe is also a leader in terms of security, as strict General Data Protection Regulation (GDPR) laws have driven data sovereignty across the data center market, while the European Cloud User Coalition (ECUC) has been set up to ensure secure cloud applications for European financial institutions.
Although the EU seems to be ahead of the curb, the United States has shown some resilience against market forces. In 2021, the U.S. Environmental Protection Agency (EPA) released new data center energy efficiency standards specifying the necessity for a 20% decrease in carbon footprint. But, given certain vertical requirements, neither the EU, nor the United States has sufficient standards to induce a cross-vertical public cloud revival. ABI Research highlights three areas that could, with tighter regulation, support social value and underpin enterprise public cloud revival:
- Sustainability: Energy consumption and the type of energy will be vital areas that need regulatory attention. Creating natural resource energy consumption goals and carbon credit trading schemes will be strong regulatory tools that can move the needle now.
- Geographic Security: Beyond Europe, data localization is becoming a driver of “edge server” deployments. To attract customers back to the public cloud, operators will need to increasingly deploy close to end users within geographic borders, while driving security protocols throughout. This involves greater transparency, so that financial institutions can understand where their data will be stored and how they are protected by market participants.
- Infrastructure Resiliency: Look to regulate cooling, server density, building size, and Artificial Intelligence (AI) implementations to drive site resiliency against external stimuli (like rising global temperatures). As digitalization becomes the basis of economic development, infrastructure must be ready and able to guarantee uptime, especially for mission-critical cloud services in healthcare and banking.
But in reality, hyperscalers are likely to use their deep pockets and influence to rally against any form of regulation, even if it could incentivize a public cloud revival. So, one must always ask the question, what regulation could be plausible in this market with oligopolistic and highly influential opposition?
- Sustainably Sourced Energy: Currently, approximately 12.2% of total energy used in the United States is renewably sourced. ABI Research believes that plausible (yet highly ineffective) regulation would mandate that public cloud providers utilize renewable energy sources at least in line with the national average.
- Greenfield Liquid Cooling Requirements: They should look to mandate liquid cooling in all greenfield data center projects. Retrofitting existing sites will be unlikely given the additional Capital Expenditure (CAPEX) requirements. This process should heavily revolve around dialogue with equipment suppliers to make sure that regulation meets financial and infrastructure constraints.
- Greenfield Regional Requirements: Natural cooling should underpin greenfield develop moving forward for infrastructure resiliency and sustainability reasons. Although governments cannot force relocation of brownfield sites, they can incentivize building greenfield sites in cooler climates through legislation, as well as government stimulus packages.
- Carbon Credit Trading: Already used in the EU, this permit-led system provides a carbon cap on emissions and incurs a penalty for those that exceed their limit. In a market with strong opposition, this tool could work given that it would provide carbon emission flexibility, rather than a hard limit on emissions.
Regulation Will Not Curb Innovation, but Will Stimulate an "Arms Race" to Attract High-Value Customers
Regulation has always been frowned upon as stifling innovation, with more flexible legislation being used to lower administrative costs and spur investment spending. However, in terms of the public cloud/data center market, ABI Research believes that regulation could force investment, leading to sustained value creation. When the prize is so big and operators have significant capital reserves and investment support, regulation can stimulate an “arms race” with the goal of creating the best public cloud conditions to support these high-value customers, while also looking to salvage reputations during a prolonged period of negative press.
This “arms race” that looks to support sustainability, energy savings, and infrastructure resilience would also provide an opportunity for Information Technology (IT) and equipment vendors (e.g., Intel, Nokia, and Ericsson). These vendors must accelerate innovation in these areas to provide the infrastructure to support this regulation. Alongside operators, these stakeholders must play a role in developing regulation to ensure that industry expectations are actually achievable. To best profit from regulation, these vendors must take the following steps: 1) align their innovation/investment strategies closely to customer/regulatory requirements; 2) use increasingly sustainable production methods to reduce emissions across the board, which will be a key selling point; and 3) increase supply chain resiliency through near shoring. These will all be critical to support and profit from changes in cloud/data center regulation.
Overall, attainable regulation, defined in consultation with ecosystem stakeholders, could underpin a public data center revival. Some commentators may say that greenfield regulation does not go far enough, but when the market holds so much power, any progress toward deeper sustainability, security, and infrastructure regulation will be promising, support a cross-vertical public cloud return, and hopefully be a stepping stone to more impactful regulation in the future.