Microsoft (NASDAQ: MSFT) is joining other tech giants in pouring billions of dollars to expand its data center operations overseas. That's allowing them to build out the infrastructure needed to support their rapidly growing cloud-based software businesses. It's a sign these companies see a bright future for data storage outside of the U.S.
However, it's not necessarily a knock on the U.S. data storage market. Here's why.
Going big away from home
Microsoft is on track to open its first regional data center in Israel early next year. The company currently stores data for Israeli customers in EU data centers, such as those in Austria, Finland, France, Ireland, and the Netherlands. However, the nation will now have a public Microsoft cloud to securely store data within its borders.
That's only the beginning of the company's cloud efforts in the country. Microsoft is also bidding on a large-scale cloud-based regional data center in Israel, competing against big tech rivals Alphabet (NASDAQ: GOOG) subsidiary Google and Amazon (NASDAQ: AMZN). It's planning on investing $1 billion to $1.5 billion in the country through data centers and the expansion of its chip research and development activities.
In addition to Israel, Microsoft is looking to pour $1 billion into Malaysia over the next five years. The investment is part of a partnership with government agencies and local companies to build and manage large-scale data centers and provide cloud services. This investment would enable Malaysia to become a data center hub where the country would manage data from various surrounding nations. Google, Amazon, and a Malaysian state telecom company also won conditional approvals to build and manage data centers in the country.
While data is global, location is vital
Companies can build data centers anywhere that have power and connectivity. For example, Microsoft has tested an underwater data center and turned shipping containers into portable data centers. Meanwhile, others have built floating data centers, and one company is looking at developing a data storage network in space.
However, location is still critical to success in the data center business because connectivity relies on proximity. That's why companies tend to build data centers in clusters near internet exchanges. They do this because it takes time for data to travel from one point to another. Thus, the closer data centers are to the end user, the faster the speed.
That's why Microsoft, other tech giants, and data center REITs, or real estate investment trusts, are building data centers in new locations, since that will speed up data flow in those regions. It also increases local data security in a volatile place like Israel, where the possibility of another regional conflict with its neighbors always exists.
Israel and Malaysia are just two of the many countries where companies are building new data centers. For example, companies are also currently expanding their data center operations to countries like India, Indonesia, and Mexico to increase regional digitization and accelerate their move into the cloud.
However, that doesn't mean the U.S. is losing ground. Data center operators are enhancing local hubs to ensure those networks don't get overcrowded. Leading data center REITs Digital Realty Trust (NASDAQ: DLR), Equinix (NASDAQ: EQIX), and QTS Realty Trust (NASDAQ: QTS) are all currently expanding their presence in Northern Virginia, the world's largest data center hub. They're also continuing to grow in Dallas, the second-largest hub, and emerging hubs like Phoenix. For instance, Iron Mountain (NYSE: IRM) is building a 40-acre, three-story campus in that fast-growing metro area.
The global data infrastructure building boom will continue
As the creation and consumption of data continue to grow, the technology industry will need more data centers and other infrastructure to support this expansion. It will need to increase capacity at current hubs and build new regional ones to prevent bottlenecks. That means there's plenty of growth ahead for the data center sector in the U.S. as we utilize more data to drive our increasingly digital economy.