Why A Resurging Data Center Market Means More Opportunities For the Channel

CRN’s Jennifer Follett and Circana’s Mike Crosby look at the impact of AI, digital transformation and U.S. tariffs on channel sales of compute, networking, power, security and storage products and services for data centers.

Jennifer Follett, vice president of U.S. content and executive editor of CRN and Mike Crosby, executive director, Circana, discuss the impact of AI, digital transformation and U.S. tariffs on channel sales of compute, networking, power, security and storage products and services for data centers.

A full transcript of their conversation is below:

Jennifer Follett, executive editor, CRN: This is Jennifer Follett with CRN, and I am here with Mike Crosby of Circana. Mike, how are you doing today?

Mike Crosby, executive director, Circana: Hey Jen, how are you? How have you been?

Follett: I'm doing well. We are here to talk about the data center market, both U.S. and global. You have some really interesting statistics to share. It's an interesting market, right? Because for a while, people thought the data center was not going to be as big of an opportunity, and now over time, it's really resurging. So tell us what you're seeing there.

Crosby: Exactly, I think what we know, and with the AI adoption and the acceleration that we're seeing, I think there were some headlines that were early like, ‘Is there overbuilding going on? Is there too much capacity?’ and other things, and we're really not seeing it. We’re seeing real advantages and opportunities for growth and really the need and requirement that the technology is really driving. So we're definitely seeing good growth overall. We did see in Q1, the most recent data that we published, that we had about a little over $4 billion, up about 6 percent in revenue, up about 3 percent in units.

So again, we're seeing good growth, good up and to the right, and we see a lot of expectations too around leases. So they're already pre-leasing in many cases, a lot of these DCs that are being built, and we're already seeing high rates of pre-leasing going on. So there's no significant pool that we're seeing of excess capacity. We see real opportunity for continued growth and expansion, so we think it's still very, very healthy.

Follett: For the U.S. market in particular, you're projecting almost 11 percent growth for the next several years.

Crosby: Yes, we're still seeing good compound growth where, again, you still have good core demand. As we look through really just again the common need around AI and AI expansion, it has really seen a lot of acceleration. And I think as we see it more mainstreamed, it's really been a key driver for us. And as the technology improves too, you're seeing again just a deeper need and requirement for more management of more data efficiently and effectively. We're also seeing different types really spin up as well, not just hyperscale that you see from the largest guys, but a lot of edge, a lot of edge momentum, too, where you're seeing opportunities.

We're again looking to take advantage of these low latency products, IoT devices, smart homes, smart cities. You're seeing a lot of need and requirement now where edge is starting to accelerate. And the nice thing about edge and edge expansion is we tend to see this happen at a little bit faster rate. There's also a little bit more management around regulatory. On the larger scale, there's a lot more time, a lot more effort, and a lot more requirements being assessed on these because they consume so much power, so much water, and so much space. And so there's a significant difference there and we can see them move a little bit more quickly, a little more agile, around deploying these devices and the needs and requirements. It also fills gaps geographically where maybe we didn't have that before.

Follett: I know there had been some talking points around where does a company want their data housed? Do they want it housed in the United States? Should it be outside the United States based on different administrations and different administrations’ rules and thoughts on data sovereignty? What are the talking points right now? How is that shaking out?

Crosby: Yeah, I think it's a little bit of a moving target because again, I think in many cases regulatory hasn't really caught up to in many cases where the technology is. So these are lot of the conversations that are certainly going on and where does it make sense both functionally from the organization and operationally, but also where does it make sense from a legal perspective and how does it need to meet, and knowing and understanding those requirements within the geographies and being in compliance obviously is a major critical thing.

So I think there's a lot of newness and there's a lot of change that's going on overall and I think that's just it. It's evolving very, very quickly, but I think there are, again, ongoing discussions. You have to balance that performance and operational efficiency and wear with also ultimately on meeting those requirements that country by country have.

Follett: So when Circana puts out these numbers and calls it data center market, what are the different types of technologies and products that are included in that?

Crosby: So the way we break out our data now overall, again, we look at each of those different kinds of segmented groups between compute, networking, power, security, and storage. And so we have ability to define within our U.S. business, again, each of those from a growth expansion, not only in revenue and units, but also the mix within the brand and within the subcategory. So we look at those as a whole, looking at DC, but also we look at each individually and understand what the contributions are for each of those different segments.

Follett: Are there segments particular to the U.S. market, that you think stand out as far as growth opportunity for the channel?

Crosby: Right now we're seeing compute, which is normally one of the higher ones is still only up about 1 percent. But if I'm looking at the most current, power is up about 7 percent, security and storage are both doing very, very well, at least through Q1. And we feel like that's going to continue to be on the forefront of really where we're going to see that growth continue. Security clearly is No. 1 in most cases, as we see that as a critical need again, not only to maintain it as environments are changing and needs and requirements are changing. The common thread through all that is certainly security.

Follett: How much of the opportunity then is split between hyperscalers vs. corporate users: enterprises, mid-market, SMB?

Crosby: Depending on how you want to define the opportunities. I think certainly from a hyperscaler standpoint, there's still significant growth. They represent right now, if you look at it, 500 or 600 locations within the U.S., and there's still good growth and expansion there. Those are obviously major spends, major investments, but I think what we're seeing opportunities for, as we were just talking earlier about, is for MSPs, channel partners within the overall channel ecosystem. I think as you start to get into a little bit more specialization of if its power, if it's cooling, if it's different aspects of really what are the requirements for these facilities. I think you're seeing a lot lean on local knowledge, local expertise and resources to be able to contribute there. We're also seeing that with edge, where edge is still again growing, call it about 7 percent of the overall mix, but I think that's where that local knowledge, understanding, resources there, and also again in that area specialization. As we see more of the channel partners orient themselves narrowly, not necessarily horizontally focused and do all things, but as you find that specialty, that niche, that ultimately drives high value, and it's a high requirement, that's where we're seeing it. We talked about earlier like in cooling, between liquid and between immersion cooling and the knowledge and understanding and the technology that ultimately contributes to those, even as some of that tied to even retro[fitting] legacy DCs, ultimately, and updating. Because again, the typical lifespan if you look at a data center is, call it

seven to 10 years core. The technology though is about three to five years. Design in the facility is a little bit longer, but certainly that refresh and that technology is going. So not only is there an opportunity I think for channel partners to contribute not only on new builds, but also on some of these existing established locations that need to be retrofitted and updated. And again, some of those were nearing those technology thresholds now, but that's still a decent part of the of the overall base of data centers within the U.S.

So I think from a channel perspective, as I just boil it down, I think to a core, I think specialization through those functions, if it's power, if it's in security, if it's in some of those select areas, even cooling as I mentioned earlier, but knowing and understanding the ability to not only participate in the new build, but also again on some of the retro, the existing. I think there's a ton of opportunity and a ton of upside for growth overall.

Follett: The power and cooling in particular is interesting because it seems like it's becoming a heyday for those types of technologies, largely because of the needs of AI, right?

Crosby: It is, it is, because again, with the GPU, the power and the heavy workloads, again, the need for cooling and the power to cool is certainly critical on both of those areas. And you're seeing more expansion and investment in things like nuclear now. And you're seeing other aspects like we just talked about, immersion cooling or is it liquid cooling? Where is it going from an efficiency standpoint? Because in most cases, as you're looking at considerations for new locations, especially for hyperscalers, as you look there's pretty significant requirements and in many cases you're going to have to generate your own power, in many cases you're going to have to generate your own ability to cool, not necessarily tapping into the grid in a material way. So they're really having to invest in new future technology and understanding what's the most efficient, what's the most effective way that we can spin these data centers up efficiently and quickly but also have the capability where we're not going to burden the local grid, local infrastructure, to that point. Now that's been a critical thing, and I think as we keep seeing technology improve, right, we're finding new and more efficient ways to effectively be able to do that.

Follett: How about the sustainability story? That's always been stronger overseas than it has been in the United States, and now it feels like with the current administration there’s less focus on environmental concerns, maybe the sustainability story is not going to be as strong in the next few years here in the States. Is that what you're seeing?

Crosby: Yeah, I think it's a good view of I think... We will see change, I think, as different priorities come across for different administrations. I think at its core though, think sustainability is still going to be critical, but I do think you're going to see varying degrees of more aggressive kind of means in trying to make that more of a top priority, or is that taking a little bit more secondary view in certain ways. So I think sustainability as a whole is going to continue to be there. I think it's just going to be in varying degrees depending on, you know, current administrations and priorities.

Follett: Speaking of current administrations, lot of tariff activity is still shaking out, a lot of things aren't totally clear yet. But what impact are you expecting the tariff situation to have on these growth projections?

Crosby: You know, certainly as a general comment, I would say tariffs bring uncertainty, not only in the amounts, but ultimately, are they going to be paused, are they going to remain? Are they going to act? Are they going to remain in place? So I think there's a lot of that going on in general, I think especially for the larger hyperscale builds and expansions, I think there's the ability to potentially absorb a reasonable amount of that, that you're not going to see that really impact materially the need to slow it down. I think you still have core pent-up demand, there's need for more capacity. think those larger scale builds are going to continue on. Maybe where you start to see less priority or maybe some edge, maybe you might see some of that step down a little bit in overall demand. I do think tariffs will be an impact.

However, I think what you have to look at too is there's a concept called tariff absorption that we've been seeing too that not necessarily 100 percent of what the tariff amount is, translate ultimately to pricing of the product. And some of that can be absorbed through renegotiation upstream with components, raw materials suppliers, assemblers, even partners that are ultimately willing to cut a little bit of margin again to try and preserve some of that integrity of the pricing. So you're going to see some of that. But I think the general take as you just mentioned, I mean it's the uncertainty of tariffs and certainly the volatility that can bring, but I think for the most part we're not seeing that being a significant downward pressure or contractor on data center demand because again we still see the need and requirement. There's always more data, there's more data and requirements around speed and low latency and all the requirements that we see in more and more of this, and I think it's not likely to curb a lot of that.

Follett: Basically saying that the need is so great that it's not going to matter if the prices go up a bit.

Crosby: Can't say that for sure, right? But I think depending on what is the price, and what pain threshold ultimately does that impact it. But I think in general, think as you had just said, I think there's the need and the requirement that's there. I think people will continue to push through and make sure that we're delivering on those things. But in general, I guess one of the other comments I would make is that on a high level, we definitely see kind of a pause in looking at [it]. There's intention, and there's a need and a requirement, but I think what the uncertainty brings people kind of playing a little bit more wait and see and certainly businesses are not immune to that. Consumers are doing that. Businesses as well. I think trying to be able to put in plan A, plan B and plan C. But if you don't have a good solid foundation to kind of put the stick in the ground and say, ‘OK, here's plan A,’ because we see that still being a little bit variable and moving, I think that's the challenge. And so what you get is you get people then maybe wanting to pause a little.

But I think access to capital is great for all these large major projects. Again, I think you see activity like I mentioned earlier on pre-leasing is high. So you don't see a lot of open capacity and no one there to lease it. But I think that's probably as about the clearest answer I can give you under the current circumstances. So it's kind of a little bit uncertain as we said.

Follett: So are you already seeing evidence of that hesitancy in the second quarter numbers or how you expect those to shake out?

Crosby: Actually, less about data center, and if I just talk for a second on things like PCs as an example, we still see very robust growth that's going on, even in the second quarter. We still see, and certainly some of that can be attributed to pull forward. I think there's timing involved. But one thing that I think was successful in a lot of these categories were we saw the foresight of the channel ultimately bringing in, taking positions on inventory early. We saw stockpiling of supply on key velocity SKUs that were brought in. So we see ample levels of supply at all points within the channel, which is good news. I mean it preserves stability and pricing. It also preserves ability to fulfill timely, where you don't have a disruption of a product or project flow, because I'm short one or two major components that make up that mix.

So I think with the channel we saw that pull forward. The thing I want to watch closely though and carefully is second half, certainly in Q3 and Q4. I think that's the question is how much of [Q1] and [Q2] is pulled forward and that ultimately what's the residual that's for Q3 and Q4 and will inventory be a factor? Will we start to see some challenges on some of those? I those are questions that are still open.

Follett: Yeah. One thing I was curious about is the impact of digital transformation. We saw so much of that get accelerated throughout and coming out of the pandemic. How does that sit now as far as a driver for these kinds of data center technology purchases?

Crosby: I think it's huge. I think what we saw, we saw early adopters initially on digital transformation, and they were able to capitalize on that and do well from an overall business standpoint. But digital transformation is an ongoing process. We continue to see that. It's much more mainstream than we saw earlier, and I think you're seeing more and more organizations not only see this is not a nice-to-have, this is a must-have. This is a must-have for me to maintain my competitiveness, my scalability, all those things. And so I definitely see it's a big factor in this because I think it's mainstream now and we've learned a lot. I think we've learned a lot of maybe what was initial thinking around how can we improve speed and efficiency and effectiveness and ultimately I think those continue to evolve as well, and technology is just a core part of that clearly.

Follett: So particular to 2026, what are some of the channel trends or drivers that you think the solution providers should really be focused on when it comes to data center sales?

Crosby: As we talked about earlier, I think these specialized services, I think depending as you take kind of take inventory of what your service assortment is as a partner. I think looking at where we see opportunity momentum, what we talked about it earlier: AI infrastructure, maybe cybersecurity, and clearly those are some core areas. But sustainability, as we mentioned earlier, there's consulting and other activities around where partners I think can drive some area of specialization that ultimately drives their ability to market themselves, I think, effectively and efficiently, but it also brings additional margin. I think that the narrower, but still where there's opportunity in the TAM and growth, brings real opportunity and higher margins. The broader, more horizontally positioned, I think it increases the pressure on competition or competitively from others, and it tends to dilute the margin proposition a little bit. So think that's still there. I'm looking on a couple of other things that I had. I mean, if you look at AI and HPC, certainly we're seeing some opportunities there for growth and expansion. The liquid cooling technologies we touched on earlier between liquid, certainly, and between immersion cooling and those areas of specializations are really critical and key.

Within edge, 5G and IoT, certainly we're seeing that expansion continue to accelerate and that knowledge and understanding also of those environments locally and having that local resource for edge is also a critical one. So I think as they understand and the channel understands where we see these potential points of expansion, overlay their services and their service offering with what we think are the key drivers for each of those, and then expand on the ones that you feel like maybe are less of a priority today, but really align and kind of profile [a] service suite with ultimately where we see opportunities for growth. And I think those are just some of the ones that we'd mentioned earlier. But again, cybersecurity as we mentioned and compliance is going to continue to be a big one. And I think as we have resources there within these channel partners that have that level of expertise, local expertise, capacity, et cetera, I think it's going to be a great opportunity for growth for the channel.

Follett: Is there any indication that security is starting to slow down? I only really ask because we've seen some recent news that CrowdStrike was going to have some layoffs. It's not super common to see the security companies pull back like that, perhaps a unique situation for them, but is there any indication of a shift there?

Crosby: Right now, at least from what I'm seeing, security continues to be, again, a key driver, and as I mentioned earlier, even on the Q1 data, if we look across both software and on hardware, security is still up double digits, up about 11 percent. So we're really not seeing it slow down now. Also, security is that common thread that runs across all these, be it the largest or hyperscalers down to the smallest on the edge side. I think security is something that has to be made as a top priority.

My expectation, at least what I'm seeing so far, is that we're not seeing really a slowdown in security. We're seeing that still being a core contributor to what the offering needs to be.

Follett: What should solution providers know about the breakdown of the data center opportunity between enterprise, midmarket and SMB?

Crosby: So if I broke it down, I looked at a couple of different things if you look at it today. Hyperscalers, about 10 percent of the overall mix, colocation, about 40 percent, enterprise almost 50 [percent] and edge about 7 [percent]. I think where the opportunity is, is being played on both of those ends. Hyperscalers and certainly on the edge side, where I think there's real opportunity for growth and that's where we still see core expansion. Now on the other ones, on colocation and enterprise, in some of those you've got some that are a little bit longer, operating a little bit longer life cycle, that's where there's also some ability and opportunity for some of the retrofitting and coming in because many of these design facilities are designed to operate functionally from a design standpoint 10 to 15 years, but as I'd mentioned, the technology in many cases the life cycles three to five years. So as you look at where that is in many of those it's still less expensive to retrofit the existing facility that we have than to break ground on a brand new facility. So there's almost two, there's net-new on the new expansion and build and where you can play. But there's also, I think, an opportunity to do some of that retrofitting where it can make some sense. And I think there's opportunities at both ends. But I think that's where I would suggest it at kind of both ends of the spectrum.

Follett: So overall a really healthy market for solution writers to focus on, particularly if they can maybe consider some new areas that they haven't before, like edge, IoT, liquid cooling, some really new things to dig into.

Crosby: That's what I think. Challenge the service assortment today and look at what are some of those areas of expertise that can be gained fairly efficiently and fairly quickly because I think some of those can certainly bring pretty good dividends as we move forward. So I think the point is just being critical of the portfolio, making sure we're aligned and as you see where the growth opportunity is, you can profile that again with your suite of services and again I feel like the core demand is certainly going to be there. But I think to stand out some of these areas of specialization bring I think some nice opportunities for growth and certainly some incremental margin. So I think it's an attractive mix.

Follett: Excellent advice, as always. Thank you so much, Mike, for joining me today. Really good to see you.

Crosby: Thanks so much for the time, appreciate it. Thanks, Jen.