Where the Cloud Rests: The Economic Geography of Data Centers

This study provides an analysis of the entry strategies of third-party data centers in the United States. We examine the market prior to the pandemic, in 2018 and 2019, when supply and demand for data services were relatively stable geographically. We compare these patterns with the entry strategies of major cloud-based data centers for services on demand, which include those known as cloud services. We conclude that third-party firms and cloud providers have different entry strategies for this digital infrastructure. The former favors urban settings more and appears sensitive to buyer demand for proximity. They trade off costs of supply, which vary with density, and economies of scale, which cannot be achieved without large volumes of demand. We also find that data center firms providing specialized services display an urban bias. Cloud providers tend to display a lower propensity for locating in urban areas, concentrating their buildings in a small number of locations. We see little evidence to suggest cloud providers will spread their data centers to any but a small number of low-density locations. Our findings support speculation about the likely direction of changes as demand shifts to the cloud, and the location decisions begin to concentrate in the hands of cloud providers.