Colocation
Executive Summary
Key Takeaways
- ✓ Colocation is a business model in which an operator leases physical space and power to multiple tenants, who own and manage their own IT equipment within the leased footprint.
- ✓ Wholesale colocation leases large, dedicated space or power blocks to a relatively small number of tenants; retail colocation leases smaller rack or partial-rack units to a larger, more diversified tenant base.
- ✓ Colocation revenue is typically diversified across many tenants, in contrast to hyperscale build-to-suit revenue, which is usually a single long-dated contracted cash flow from one anchor tenant.
- ✓ Colocation pricing is typically based on committed power (kW) per rack or per unit of leased space, with premium pricing for higher-density capacity.
Definition¶
Colocation is a data centre business model in which an operator leases defined units of physical space and power to multiple tenants, who install and manage their own IT equipment within that leased footprint, while the operator provides power, cooling, physical security, and network connectivity.
Wholesale Versus Retail Colocation¶
Wholesale colocation leases large, dedicated space or power blocks, typically 250kW and above, or a full suite or cage, to a relatively small number of tenants under multi-year contracts. Retail colocation leases smaller units, individual racks or partial-rack space, to a larger, more diversified tenant base, typically billed per rack or per kW of committed power. See Data Centre Business Models for the full comparison across business models.
Why It Matters to the Financial Model¶
Colocation revenue is typically diversified across many tenants, in contrast to hyperscale build-to-suit revenue, which is usually a single long-dated contracted cash flow from one anchor tenant. This diversification trades concentrated counterparty risk for greater exposure to tenant churn and utilisation risk, and should be modelled with the revenue decomposition and occupancy discipline described in Colocation Financial Models.
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Frequently Asked Questions
What is colocation?
A data centre business model in which an operator leases defined units of physical space and power to multiple tenants, who install and manage their own IT equipment within that leased footprint, while the operator provides power, cooling, physical security, and network connectivity.
What is the difference between wholesale and retail colocation?
Wholesale colocation leases large, dedicated space or power blocks, typically 250kW and above, or a full suite or cage, to a relatively small number of tenants. Retail colocation leases smaller units, individual racks or partial-rack space, to a larger, more diversified tenant base.
How does colocation differ from a hyperscale build-to-suit facility?
Colocation revenue is typically diversified across many tenants, while hyperscale build-to-suit revenue is usually a single long-dated contracted cash flow from one anchor tenant, a materially different tenant concentration and risk profile.
How is colocation typically priced?
Based on committed power (kW) per rack or per unit of leased space, often with premium per-kW pricing for higher-density racks given the additional cooling infrastructure required to support them.
Related Articles
Data Centre Financial Modelling
Data centre financial modelling is the discipline of modelling a data centre operator's revenue, cost, and capital structure from its capacity-denominated drivers, power, space, and cooling capacity, rack density, and tenant contract structure, rather than the generic market-price and headcount-growth drivers used in most corporate models, or the pure occupancy-and-lease-term drivers of conventional commercial real estate. This page is the hub for the Knowledge Centre's data centre financial modelling content: how colocation, hyperscale, and enterprise business models each require a distinct model architecture, how rack revenue and occupancy are decomposed into their separable underlying drivers, and how capacity planning and financial KPIs tie the model together, as this domain expands to cover operations, revenue, investment, and governance practice across the sector.
Colocation Financial Models
Colocation financial models project revenue from a diversified base of tenants leasing space and power in defined units, per rack or per kW of committed capacity, rather than a single anchor contract. This guide sets out how colocation revenue is decomposed into space/power revenue, cross-connect and ancillary fees, and how occupancy, pricing, and churn assumptions should be modelled as separable drivers rather than a single blended revenue-per-tenant figure.
Data Centre Business Models
Data centre operators run under several structurally different business models, wholesale colocation, retail colocation, hyperscale build-to-suit, enterprise/captive, and managed services, each of which ties revenue, contract tenor, and capital intensity to a different mechanism. This guide sets out how each business model's revenue and cost mechanism differs and, correspondingly, how the financial model architecture appropriate to each differs, since applying a retail colocation-style model to a hyperscale build-to-suit facility, or vice versa, misrepresents the operator's actual revenue and risk exposure.
Rack Revenue Models
Rack revenue is the core billing unit of colocation data centre revenue, priced per rack, per kW of committed power, or a hybrid of the two, with premium pricing for higher-density racks. This guide sets out the mechanics of rack-based pricing, density tiering, and how to model power draw billing and contract escalation without conflating them into a single blended average rate per rack.